Improve risk-sharing by enrolling more students in the federal government income based repayment (IBR) and Pay as You Earn (PAYE) programs and independent investor future income share agreements (ISAs). The federal government repayment programs are cumbersome to understand and enroll in, and are thus underutilized. The government could remedy this problem by automatically enrolling students in IBR and PAYE.
Unlike student loans, ISAs are financial instruments in which a private investor—which can be non-profit or for-profit—finances a student’s education in exchange for a certain share of the student’s future income over a specified number of years. ISAs carry no principal balance or interest rate. All students are guaranteed affordable payments, with some paying more and some paying less—depending on their success after school. This arrangement frees students from the default risk associated with not finishing college, struggling in their entry into the labor market, or choosing a less lucrative career path. In order to foster the creation of a robust ISA market, the federal government would need to provide legal clarity—by authorizing a federal regulator, crafting disclosure regulations, and putting in place strong consumer protections and prohibitions on discrimination based on certain student characteristics, such that ISAs do not strictly help students whose demographic backgrounds indicate a higher likelihood of success.
Source: Third Way, A New College Compact; American Enterprise Institute, Investing in Value, Sharing Risk