Are Your Students Looking For A Loan?

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For her first two years at Purdue University, Amy M. Wroblewski, a business major, took out about $20,000 in two private student loans to cover her costs, one with an 8.9 percent compounding interest rate and the other with a 9.7 percent rate.

Ms. Wroblewski said she opted for more expensive private loans over federally subsidized loans because the application process was much easier.

Then, in May, Purdue, in West Lafayette, Ind., began accepting applications for a different type of student financing, an income-share agreement, or I.S.A., through its “Back a Boiler” program (the university’s mascot is the Boilermaker). Ms. Wroblewski was among the first to apply.

Under the program, the college advances money to applicants based on its estimate of their future earnings. (Computer engineering majors may qualify for more aid than, for example, turf science majors because engineers traditionally earn more.) Ms. Wroblewski was approved for $28,000 to help cover tuition and living expenses for her final two years.

For the I.S.A., students sign a contract agreeing to repay advances after they leave school by sending a fixed percentage of their income to Purdue for up to nine years; the percentage is also based on the university’s estimate of how much they will make after leaving school. Alumni who earn less than expected may not pay back all they owe (the university promises to forgive unpaid balances after nine years). Those who earn higher-than-expected salaries may have to pay back more than they received, though Purdue says it will cap repayments at 2.5 times the amount advanced.

Ms. Wroblewski agreed to pay 3.7 percent of her salary to Purdue for nine years after her graduation. If she were to land her dream job, in the human resources department at Ford Motor, she could make about $88,000 a year, according to Glassdoor, a career advice website. Over nine years, then, she would pay back about $29,300 — a simple interest rate of about 4.6 percent.

“I think it’s an amazing deal,” she said. “I am encouraging all of my friends to apply.”

Her parents agreed. “The numbers were wonderful,” said her mother, Jacqueline, a waitress. Her father, Greg, a parts manager at a collision-repair shop, agreed: “We told her to jump on it.”

As students and families in the United States have collectively accumulated more than $1.2 trillion in debt, academics and entrepreneurs are dusting off some old financing alternatives like I.S.A.s and rolling out new ones. Like loans, these alternatives let students buy now and pay later; unlike loans, they do not have fixed or variable interest rates.

Ted Malone, the executive director for financial aid at Purdue, said the university would suspend payments for graduates who make less than $20,000 a year or are unemployed and actively seeking a job. In any case, he added, the obligation will expire nine years after the first payment is made.

If participating students do not graduate, they still must repay the advance, according to the original terms — starting six months after they leave school. The low-income and unemployed-but-looking protections still apply.

Money for Back a Boiler — about $4.5 million to $5 million — will come from the Purdue Research Foundation, which runs the university’s endowment, Mr. Malone said. Private contractors will sign up students, collect payments and deal with delinquencies.

Plan sponsors — including private I.S.A. providers, crowdfunding proponents and even private lenders — say these alternatives are intended to supplement federal below-market student loans, not replace them, because federal below-market loans tend to be cheaper and come with more consumer protections, including a provision tying payments to a borrower’s income. But should the alternatives grow beyond their current embryonic stage, they might be less expensive than private loans and so-called Plus loans, which are for graduate students and undergrads’ parents.

A number of entrepreneurs have offered a small number of test-case private I.S.A.s but have been hampered by the absence of a legal framework for such arrangements, which do not qualify as loans because no interest is charged. Lenders and borrowers have asked whether state or federal agencies would regulate the business, whether lawmakers would limit maximum paybacks and how I.S.A.s would be treated by tax authorities.

“There is just a lot of uncertainty,” said Casey Jennings, chief operating officer of 13th Avenue Funding, which has run a pilot I.S.A. program that lent $15,000 each to 11 students at a community college in California. Seven years ago, “when we started this, we thought, ‘How hard could this be?’” he said. ”Now we know.”

The online providers Upstart and Pave ran programs for two years before closing them in 2014. Both companies now focus on brokering traditional private student loans. SoFi, another online provider, began as a fund allowing Stanford alumni to lend directly to graduate students in the business school, but it soon switched to conventional lending, which it found more profitable.

Upstart’s founder and chief executive, Dave Girouard, said it was difficult to get people to buy in to the idea of I.S.A.s. Borrowers likened it to indentured servitude, and potential investors, the source of Upstart’s funds, were skeptical of the risks and returns. In two years, Upstart arranged less than $3 million in I.S.A.s, he said. Since switching to conventional student loans two years ago, Upstart has arranged about $400 million in financing.

Education Equity, also in Chicago, has arranged 29 I.S.A.s over the last three years. The founder, Andrew Davis, says that for each $5,000 a borrower requests, his firm charges 0.7 percent of the borrower’s salary for 10 years. Assuming, as Mr. Davis does, that his borrowers will earn an average of $80,000 a year, they would pay back $5,600 for every $5,000 they receive — a simple interest rate of 12 percent.

Other start-ups, including People Capital and Green Note, took a different tack, building crowdfunding websites at which students, for a fee, could ask to borrow directly from friends, family or investors they did not know. Many of these peer-to-peer services are no longer in operation.

One that is still operating, WeFinance, focuses on students who do not have access to below-market-rate federal loans — graduate students, undergraduates who take more than four years to complete their studies, veterans who have exhausted their G.I. Bill benefits and students in educational programs, such as software boot camps, that are not recognized by federal loan programs.

Students who are willing to try these alternative approaches say they do so because the application process is less onerous than the one for federal student loans.

Aside from Purdue and some of the entrepreneurial approaches, other alternatives are being explored.

Susan Dynarski, a professor of education, economics and public policy at the University of Michigan, has proposed replacing the current “bewildering array” of options with a single government program, Loans for Educational Opportunity, in which federal low-interest loans would be repaid via payroll deductions after the students graduate.

“Student loan payments will automatically rise and fall with a borrower’s earnings, just as contributions to Social Security rise and fall,” Professor Dynarski said in a 2013 policy paper she wrote with Daniel Kreisman, now an assistant professor of economics at Georgia State University. “A fraction of earnings will be deducted from each paycheck, with a larger fraction taken when incomes are high and a smaller fraction when incomes are low.”

Professor Dynarski said it could be more efficient to have a federal agency manage this type of program because “the government is uniquely suited to do this” through the income-tax system.

In any case, Zakiya Smith, strategy director of the Lumina Foundation, a private foundation that studies ways to increase the number of American college graduates, said that if prospective students needed to borrow money from any source, they “should choose colleges based on how much they expect to earn” after they graduate. Affordability matters, she said.

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