Tiny Minnesota pilot program offers 'income-share' instead of student loans

At first glance, Baou Lee admits, the offer seemed too good to be true.

As a senior at Gustavus Adolphus College, she was familiar with student loans. Then she heard about a new program, starting fall semester, that would let her borrow thousands of dollars — at no interest.

Instead of taking out a student loan, Lee signed an agreement to pay a percentage of her future income, for 12 years, in exchange for the money to finish school.

Lee is one of 15 Minnesotans taking part in a pilot project, co-sponsored by the nonprofit College Possible, offering so-called "income share agreements" as an alternative way to pay for college.

Under this model, Lee's monthly payments will depend on how much money she earns after graduation. If it's less than $20,000 a year, she pays nothing. After that, the more she makes, the more she pays.

To its harshest critics, the idea smacks of indentured servitude. But the concept is starting to pop up around the country as a potential answer to the student loan crisis.

"We're trying to create an [option] that allows students to cover their cost of college without all the risk and anxiety that comes with it," said Kevin James, the founder of Better Future Forward, a national organization co-sponsoring the Minnesota pilot project.

At College Possible, officials say they were intrigued by the idea precisely because it doesn't lock new graduates into fixed monthly payments, like traditional loans that can last 10 to 25 years.

"There are only so many options for how you can pay for college, and we wanted another option," said Traci Kirtley, chief program officer for College Possible, a Minnesota-based group that works with low-income students.

The concept has been tried with mixed results. In 2016, Purdue University started its own program, called "Back a Boiler," which has distributed $5.7 million to 466 students so far, officials say. But several similar efforts have quietly closed up shop.

While it may not be for everyone, Kirtley says, the option could be a lifeline for some financially stressed students. So her group decided to test it on some volunteers.

For Lee, a 21-year-old psychology major from Bloomington, the timing couldn't have been better. Last summer, she discovered that she couldn't afford to go back to college because of an unexpected drop in federal financial aid. Her only choices, she thought, were to drop out or borrow money at high interest from a private lender.

Still, she was skeptical when her adviser at College Possible told her there was a third option — that didn't involve paying interest. "I just wanted to make sure that what I'm getting into is actually a very good thing, and not just going in blindly and regretting it later," she said.

Lee wasn't the only one asking tough questions. "That was the biggest challenge, helping people understand what they're signing up for," said Kirtley. "We know what grants are, we know what scholarships are, we know what loans are. And this is none of those."

In Lee's case, she received $6,000 for this school year in exchange for a promise to pay 2.3 percent of her future salary for 12 years.

The terms can vary dramatically, depending on the length of the contract (4, 8 or 12 years) and the student's major. (The program's website lets students calculate their options).

Students in high-demand fields, like computer science or engineering, pay a smaller fraction of their income than, say, English or theater majors. For example, in exchange for $15,000, a senior majoring in theater arts at the University of Minnesota would pay 9.56 percent for 8 years, while an electrical engineering major would pay 4.62 percent for the same period.

That's based on the assumption that engineers will earn more, says James.

By comparison, the same amount of money, as a private loan, would cost between $215 and $282 a month for 10 years, according to the website.

Under this system, some high-earning students would end up paying more than a traditional loan, James said, while others would pay less.

It is something of a gamble, says Kirtley. "Maybe I won't get a really good job and this will be a protection for me; and if I do get a well-paying good job, then I'm willing to pay more."

Skeptics worry that these arrangements could backfire, especially on students with student loans as well. "It can be a pretty significant financial burden," said Clare McCann, a higher-education expert at New America, a Washington-based think tank. "My question is, have we really helped that person, because now they're making an additional payment on top of their loan payment?"

She said such contracts have few consumer protections, and students are agreeing to pay an indefinite amount of money. "There's a fundamental fairness question," she said. "And we really don't know how that will play out in the long term."

James, however, says that there are consumer protections in this program, including a lifetime cap on payments and the option to buy out early.

The pilot project was funded by $150,000 in donations, but he hopes the program eventually will be self-sustaining as future payments refill the coffers for future loans.

"Maybe this is dreaming big, but our goal is to make something like this available to every disadvantaged student in America who could benefit from it," he said.