Rapid advances in technology, including artificial intelligence and automation, are transforming industries and reshaping the skills necessary to secure and keep a job. Consequently, today’s workers need affordable, skills-based, and high-quality training over the course of their careers.
The education system relies on high school and, for some, traditional higher education to prepare workers for careers. But this education-to-career pipeline was not designed with adult learners in mind, and not built to provide lifelong learning opportunities. Moreover, traditional four-year higher education, which involves significant amounts of time and expense, is not well-suited to provide in-demand skills rapidly at an affordable cost. By contrast, community colleges and private training programs offer short-term skills training that is better suited for adults. But even within these types of programs, the quality can vary, is not necessarily tied to outcomes, and, in the case of private training, can be expensive.
Income Share Agreements (ISAs) are emerging as a financing mechanism in which a school or other entity pays for all or a portion of the up-front tuition costs, and in return the students commit to pay a percentage of their future earnings over a period of time after completion of the program. As we think about ways to transition to a system of lifelong learning, Income Share Agreements (ISAs) offer certain benefits if coupled with the proper regulatory oversight:
- Affordability: ISA payments are structured to correspond to a person’s ability to pay, meaning that people who have lower post-completion income pay less than those who have higher levels of post-completion income. Conceptually, fewer people who seek additional education and training will be saddled with debt payments that exceed their ability to pay.
- Higher Quality: Because payments are based on post-completion income, ISAs reward effective training programs and disadvantage providers of poor-quality training because providers are paid on the basis of the ability of participants to find work and the income level associated with that work. This could lead to an overall increase in training quality.
- Less Risk: When adult learners enroll in training programs, they assume the risk that their chosen program will provide a sufficient post-completion income to justify the cost. But for a number of reasons, training doesn’t always translate into higher incomes that justify the cost of the program. ISAs shift a portion of that risk from the participant to the entity providing the ISA, leading to greater risk pooling.
Non-traditional private education institutions have taken the lead in using ISAs. Institutions using ISAs include Holberton School in San Francisco, which offers a two-year training program in software engineering, and Kenzie Academy in Indianapolis, which offers coding and computer science courses that are coupled with on-the-job training through paid apprenticeships. Lambda School, also in San Francisco, initially started as a coding bootcamp but is expanding its courses to include cybersecurity and nursing. Traditional higher education institutions, such as Purdue University, the University of Utah, and Colorado Mountain College, now offer ISAs to their students.
However, it’s important to note that student advocates and higher education experts have expressed concerns regarding private ISAs (i.e. where the private sector originates and finances the ISAs). They argue that students could be uniquely vulnerable to predatory ISA providers, especially in the direct-to-consumer market (as opposed to the education provider-based ISA market). Consumers already struggle to understand the terms of complicated financial products that are well-established, and because ISAs are a relatively new financial product, students and their support networks could struggle to understand the terms and conditions of ISAs. If schools or training programs don’t provide simple and accessible information regarding the structure of how ISAs are repaid, these consumers could be at risk of making bad economic decisions. Another concern was expressed in a recent New York Times op-ed, in which the author worried that ISAs may give private investors an incentive to discriminate against students by “skimm[ing] the cream of students off the top,” which could draw high-achieving students away from the federal student loan program, creating a two-tier system and weakening the overall creditworthiness of those who continue to use the federal loan system.
These concerns could potentially be addressed with strong consumer protection regulations. There are currently few regulations at the federal or state level explicitly designed to govern the operation of ISAs, and there is a lack of clarity on how consumer protection laws apply to ISAs. Policymakers should explicitly regulate ISAs in order to provide confidence to those who use ISAs that they will be protected from potential abuse by predatory investors and providers. In addition, regulations could help provide certainty to ISA providers regarding what terms and conditions could be offered and ensure that providers cannot “cherry-pick” students.
Another approach is for public agencies to administer ISAs for skills training programs. For example, an innovative new program was launched last week by San Diego’s local workforce board (San Diego Workforce Partnership, or SDWP). Their new program is designed to help unemployed and underemployed workers gain access to in-demand skills training provided by the University of California San Diego Extension (UCSDx). The students will pay back between 6 and 8 percent of their income over 3 to 5 years (depending on the course of study), and they will pay nothing if they make less than $40,000 upon graduation.
Local workforce boards generally offer free training to workers by using federal, state, and sometimes private funds. But these funds are often inadequate to serve the growing population of workers who could benefit from these services—since 2001, federal funding for state workforce training systems has declined by 40 percent in real terms. By using an ISA, the SDWP is attempting to create a renewable learning fund which will be able to serve hundreds of workers every year. Moreover, because the government is administering the ISA, it can provide relevant information about the terms of the ISA to training participants, and ensure that these terms are fair and the training is broadly available without discrimination.
In an economy where it will be increasingly necessary to add new competencies and skills over the course of a career, ISAs represent a financing tool that could help make it easier and more affordable for adult learners to seek short-term training options. But to avoid harming participants in ISAs and exacerbating existing structural inequities, government must play an important role, either as regulators, ISA administrators, or both.