4 Surprising and Outrageous Ways Private Companies Are Fueling the Student Debt Crisis
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In a society where crushing student debt is the new normal and markets are flooded with promissory riches long before they materialize, that popular refrain “our children are our future” may just be another business proposal.
“Investing in human capital makes sense as an asset,” says Reed Handley, head of Communications & Operations at Pave, one of several new companies that offer current college students and recent graduates income share agreements (ISAs). Income share agreements were first proposed by Milton Friedman, a man one as a general rule should not listen to, who suggested in his essay “The Role of Government in Education” that shareholders “'buy’ a share in an individual’s earning prospects; to advance him the funds needed to finance his training on condition that he agree to pay the lender a specified fraction of his future earnings.”
The model that Pave works with expands upon Friedman’s blueprint. Young people come to Pave looking for funding for a business proposal or higher education—essentially a long-term path toward financial success. If Pave likes their odds of becoming financially viable, which they determine using an algorithm (their own special recipe), they give the applicant a platform and encourage backers to fulfill his or her funding request, around $22,000 on average. Then, if the candidate gets funded, they sign a contract agreeing to pay their investors a certain percentage of their future earnings. And the applicant emerges from the chrysalis of their crowd-sourcing campaign as an asset.
Income share agreements (ISAs) have gained legitimacy in the past couple of years as a way for recent college graduates to jumpstart their careers and, in many instances, pay off their student loans early. Since 2013, companies like Pave, Upstart, CommonBond and Lumni—pioneers of these sorts of arrangements—have been covered by the New York Times, CNN, Slate and Vox.
Pave, which was founded by a former Goldman Sachs banker, argues that they serve as a healthy alternative to the junk loans many students are forced to rely on to fund their educations. “Interest isn’t at the heart of it,” said Handley, “you are sharing income, so there’s no principal amount that you’re paying back. Let’s say you raised $50,000 from 15 backers and pay back 5 percent. You only pay 5 percent of what you earn.”
“If someone is earning and willingly not making a payment,” Handley said, “we get in touch with them to make sure they haven’t had a lifestyle situation that’s changed that affects their income. If they willingly default then we can pursue standard methods of collection. But we haven’t had to do that.” Those funding their projects with Pave are not required to make payments at times when they are making less than 150 percent of the poverty line.
Pave also sets the minimum age requirement at 18 years. However young this cutoff may be, it’s an improvement compared to predatory student loans, debts that young people can take on long before they turn 18.
Still, there are many drawbacks to ISAs, some arising from the choices these companies are making right now, others built into the very ideology they sprang from. Here are four reasons why ISAs can’t reform our student loan crisis, but instead will only exacerbate it.
1. Invest In Your Ideology Today
At Pave, young people applying for or receiving backing are referred to as “Talent,” often with a with a capital “T.” One aspect that Pave likes to talk up is the personal touch afforded to Talent and backers alike. The backer, if they so choose, can act as mentors to their young investments, advising them, keeping up a regular correspondence, Daddy Warbucks-ing it up over Gchat.