How ISAs Allow Rich People to Exploit College Students
by Benjamin Studebaker
A friend of mine at Purdue University recently informed me that under the leadership of former Governor Mitch Daniels (R-IN), Purdue has become the first major American university to offer Income Sharing Agreements (ISAs) to students as a new alternative to traditional student loans. ISAs are exploitative and morally disgusting. Here’s why.
There are many different ways to pay for college around the world. Traditionally, in the United States, we have a two-tier system in which wealthy families pay for their kids to go to school out of pocket while poor and middle class families often have their kids borrow some or all of the money they need. Student loans are borrowed at relatively low interest rates, but students still end up paying back the lenders more than the full value of their tuition. Most student loans are provided by the government, which runs most of the public universities, so in effect interest on government loans is being paid into the same public sector that runs the universities–effectively, many poor and middle income students are being charged a regressive tax for being unable to pay out of pocket. Loans must be repaid irrespective of how much students earn after graduating, which means increasingly large numbers of underemployed college graduates have their lives significantly blighted by student debt.
Most European countries do not operate this way. In England, students repay student loans only if their incomes exceed about $30,000. If there is any debt remaining 30 years after the loan is taken out, the debt is waived. But interest is still charged on the loans, so students that borrow can still end up paying more than students whose parents pay out of pocket. In Germany, student fees are negligible and most German university funding comes out of general taxation, with external grants making up most of the remainder. This is the kind of funding scheme Bernie Sanders pushes for.
Another option is the graduate tax, which was proposed in the UK but ultimately rejected. A graduate tax allows the state to charge a flat income tax on all college graduates. Compared to the income tax, a flat graduate tax is regressive and if the rate is high enough it enables the state to charge far more money for college than the present tuition system. It’s even cruel to young rich people, who could end up paying exorbitant amounts of money for college if their earnings are high enough. That said, a graduate tax is more progressive than a flat fee, and in that respect it might be marginally better than the way Americans currently do things.
But ISAs are completely indefensible. There is nothing good about them at all and they are without a doubt the least ethical way to fund a university system. Here’s how they work:
Private investors lend students money and in exchange, the student promises the pay the private investors a fixed percentage of their income for a fixed number of years no matter what their future income might be.
It doesn’t sound so bad when you don’t think very hard about it, but the negative consequences of ISAs are many and severe:
- Private sector investors don’t have any reason to lend a student money unless they believe they can make a profit off that student. This means that students in degrees that aren’t associated with high-paying jobs will become more difficult to fund the more dominant ISAs become.
- The more dominant ISAs become and the fewer financial alternatives students have to ISAs, the weaker the students’ negotiating position becomes and the easier it is for private investors to extract the maximum return.
- As with interest on student debt, because affluent families pay out of pocket, ISAs are a regressive tax on coming from a poor or middle class family. But student debt is mostly repaid to the state, and the state uses that money to fund many public services, from the university system to welfare to infrastructure. With ISAs, the surplus extracted from students is paid to wealthy investors, directly redistributing wealth from the bottom and middle to the top of the distribution. This is extremely and nakedly regressive.
- As with the graduate tax, an ISA allows the lender to potentially extract exorbitant amounts of money from graduates who quickly begin earning large incomes. But unlike the graduate tax, where the money is paid to the state, ISAs send this money directly to wealthy private investors, which is again extremely and nakedly regressive.
- We have a student debt bubble, but unlike the housing bubble most student debt is owed to the government rather than private investors, and this limits the student debt bubble’s ability to damage the rest of the economy. ISAs could change that. Down the road, ISAs could be packaged by Wall Street into derivatives in much the same way that mortgages were in the years leading up to the 2008 financial crisis. ISAs in highly profitable majors like Engineering or Computer Science could be used to conceal large numbers of junk ISAs on students with low performing majors, encouraging the proliferation of subprime ISAs. Insurance could be sold on them in the same way that insurance was sold on mortgages. Eventually ISAs could become the foundations of a sequel to The Big Short, with utterly devastating consequences.
ISAs are a form of restricted indentured servitude (in which a person agrees to work for another person for a fixed amount of time in exchange for something). They are not dissimilar to outright serfdom (in which a person works some percentage of the time for themselves and some percentage of the time for a private lord). These kinds of economic arrangements are not capitalism–they’re feudalism. Under capitalism, the worker owns his own labor power–the only entity that can confiscate his wages is the state. Under capitalism, employers may not always pay fair wages to their workers, but they are never entitled to confiscate a fixed percentage of the wages of workers they do not even employ themselves. It is not legal in capitalist societies to make someone a serf or an indentured servant. This potentially turns venture capitalists into feudal lords.
It’s easy to dismiss how potentially horrifying this is–initially, ISAs may only be one of many funding options at a handful of universities. Supporters will say that you don’t have to get one if you don’t want one. But this is precisely how you create a class of serfs or indentured servants over time–you start by contracting small numbers of them on what looks like a voluntary basis, and you gradually expand the program, making it harder and harder for people to remain outside of it. As the alternatives become more limited, the students’ negotiating power decreases further, and the investors slowly lobby the state to allow them to gradually extract higher percentages for longer periods.
Defunct presidential candidate Marco Rubio was a big proponent of ISAs–in his 2014 bill, he proposed ISAs of up to 15% of income for 30 years. Thankfully, this bill went nowhere, but it illustrates something very important–republicans are already prepared to accept ISAs as high as 15% for as long as 30 years. Imagine a society in which this kind of agreement has become the norm. Imagine how high the percentages might creep, how much longer the agreements might potentially become. Imagine what happens when a single wealthy investor begins accruing large numbers of ISAs. A single rich person could own 10 ISAs from 10 students at 10% and effectively own the entire labor power of a single person for 30 years. There would be nothing illegal about that under Rubio’s proposal. People think that Rubio is a moderate. What would Ted Cruz do? What would Ted Cruz do if he were elected in a political climate where these ISAs are standard practice and no longer considered controversial?
The ISA poses a clear and present danger to the freedom of the next generation of workers.
In the letter Purdue sent out to students, they totally whitewashed the program:
Purdue claims that ISAs aren’t intended to replace government loans, but their intentions are no guarantee against decisions by future governments to expand the program.
Purdue claims that the ISAs they’re approving will only require repayment for nine years, but what’s to stop future universities and investors from demanding longer repayment as ISAs become normalized? If Marco Rubio is cool with 15% and 30 years now, what might ISAs look like in 2040?
Purdue speaks of the ISAs’ no principal balance and no interest as if these were advantages, but this conceals the real consequences–investors have no reason to agree to ISAs unless they expect to recover more than the tuition (which would be the principal if this were a conventional loan) and the amount they extract above the value of the tuition can far exceed the value of the interest payments required by conventional loans. By “adjust with the students’ income” Purdue really means “allow the investor to potentially make of a profit of thousands, tens of thousands, or hundreds of thousands of dollars from a single student”.
Purdue highlights that students will pay less than expected, but this is only the case if the private investor lends foolishly and it makes no mention of the possibility that the student will pay far more than expected, which is precisely what investors are betting will happen when they make the agreement.
As time goes on, we will likely see more people using manipulative and deceptive sales tactics to foist ISAs upon unsuspecting parents and students along with accomplice politicians hawking ISAs as a policy solution to the student debt bubble. The reality is that ISAs are likely to increase the wider economic system’s exposure to the risks of a burst bubble. They are a sick ploy by rich investors to profiteer and exploit the young people of this country, potentially turning large numbers of them into serfs and exposing our economy to unreasonable systemic risks. They are completely malignant with no redeeming features and every thinking person should reject them as such.