The rate of borrowing to pay for a college education has steadily increased over the last two decades to the point that the nation’s aggregate debt for student loans now exceeds $1 trillion. Recent studies indicate more than two-thirds of American families now worry whether they will be able to finance a college degree.
This concern is prompting a demand for alternative forms of financing tuition payments.
Some alternatives are worthy of serious consideration, including nascent efforts to restructure college financing as equity investments in lieu of traditional lending with fixed interest rates. A Chicago-based start-up firm called Equity Education is getting attention for a business plan that involves taking a stake in a borrower’s future income. For example, the company would receive a payback from a graduating student’s annual income.
That approach favors low- and middle-income graduates who would, in most cases, face a debt burden less than one incurred by taking out a traditional interest loan. If the student does well financially after graduation, the company makes a better return on its investment. For borrowers who earn higher incomes, there is a ceiling that limits the company’s return to assessments on a maximum of $200,000 in income.
This concept is not entirely new: other companies have unsuccessfully tried a similar approach in the past. But the notion of framing student lending as an equity investment is becoming more attractive as levels of debt continue to increase.
Of particular interest is the program “Pay it forward, pay it back” being discussed in Oregon. It would eliminate up-front tuition payments and instead take a percentage of future income. Students in state-run colleges and universities would have their total tuition waived in exchange for a commitment to pay back the state about 3 percent of their income during their first 24 years of employment.
Those concerned that too many potential students are being priced out of a college education support this approach.
That concern is valid, as demonstrated by a variety of recent studies showing that one out of three American adults are either currently paying at least part of a child’s college costs, or are planning to. Seventy-one percent are worried they won’t have the financial resources to see their children through to graduation.
Currently, 40 million Americans are repaying student debt. Sixty percent of students will borrow to attend school, compared to half that percentage two decades ago. The rate of default on student loans is increasing to levels that threaten the sustainability of lending programs.
Efforts to innovate new approaches to the process of financing a college degree should be welcomed and encouraged as a way to help ensure the benefits of a higher education are available to the largest possible number of future students.
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