Purdue University Experiments with Income-Share Agreements
Purdue University’s new “Back a Boiler” program will provide the university’s juniors and seniors with the option of an income-share agreement (ISA) to supplement federal education loans.
Under an income-share agreement, the borrower agrees to repay a fixed percentage of their income after graduation for a period of time, as opposed to a fixed dollar amount. It is similar to the income-driven repayment plans offered by federal student loans. Income-share agreements shift the risk that the borrower won’t get a good job from the borrower to the investor.
With Purdue’s plan, the repayment term will be 9 years, starting six months after the students leave school. The repayment obligation will be paused for up to five years if the student transfers to another college or enrolls in graduate school. There’s a minimum income requirement that suspends the repayment obligation for borrowers who earn less than $20,000 a year.
The percentage of income will be based on the student’s academic major, ranging from 0.41 percent per $1,000 for Fine Arts to 0.26 percent per $1,000 for Computer Science. There will also be a maximum payment cap that prevents borrowers from repaying more than 2.5 times the amount of money they received.
Purdue’s Back a Boiler program is intended to compete with private student loans. For a Purdue student majoring in computer science, the student will repay $1.35 on average for every dollar received, assuming that he or she earns $62,000 a year after graduation. That’s the equivalent of a 7 percent interest rate. The Fine Arts student will repay $1.42 on average for every dollar received, assuming an annual starting salary of $29,000 after graduation. That’s the equivalent of an 8.3 percent interest rate.
Purdue’s program appears to have addressed most of the problems with previous attempts to offer income-share agreements.
Purdue has partnered with Vemo Education, 13th Avenue Funding and the Jain Family Institute to offer the income-share agreements.
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