Income Sharing Agreements and Education Finance: An Opportunity for Students and Investors

Photo by Michael Marsh on Unsplash

By

Victor Igono

Date Published

February 23, 2022

Category

Insight

Basic economics teaches that education is critical to economic development. It affects national productivity, civic activities, security, even health outcomes. It is therefore not surprising that everyone (politicians and parents alike) stresses the importance of education. It is also not surprising that nearly 1.3 million students sat for the 2021 Unified Tertiary Matriculation Examination (UTME), 2.1 million currently study in Nigerian universities, and another 100,000 Nigerian students study abroad. Suffice to say that Education remains in high demand notwithstanding the justifiably scary numbers of out-of-school kids currently in Nigeria. However, the above statistics do not adequately paint the broader picture of education access in Nigeria and other parts of the world. 

For every 1.3 million students that sit for the UTME, only a fraction of those students proceed to universities. There’s a multitude of reasons for this, including failure to meet the requisite cut-off marks, an unmeritocratic admissions system, and lack of financing even if the admissions are secured. The last point is of particular interest. Lack of funding to pursue higher education remains a key impediment to education access especially at the post-secondary level. As is popular in Nigeria and most developing countries, financing for education is largely sourced out of pocket, with few exceptions for scholarships (merit and need-based). In more developed countries, university loans, provided by the government and private lenders, constitute a significant chunk of education financing. Each option has its dangers. 

Out of pocket payment for university education in Nigeria prevents a sizable number of secondary school graduates, especially from low-income urban and rural areas, from pursuing higher education, with long-term consequences for income and other outcomes. Admittedly, many Nigerian graduates with degrees do not have jobs. But that’s a story for another day. Either way, there’s no gainsaying the limits on opportunities placed by lack of access to higher education as a result of low income. It creates a vicious cycle where students are unable to attend schools because their parents can’t afford it. They, in turn, are unable to earn enough to fund their children’s education, leading to an endless cycle of low earnings, possible spike in crime rate and low productivity at the national level. Similarly, while access to loans has spurred high university enrolment rate in developed economies, the high interest rate on these loans, regardless of post-university income, has led to a massive student debt problem. In the US, the amount of loans owed by students stood at $1.6 trillion⁵. The high debt obligation, combined with the pandemic, is unleashing a massive mental health crisis in America. It all brings to bear the question: can we do something differently? 

Income Sharing Agreements

Picture this. Pick a university of your choice for a bachelors or masters degree. If you get accepted, you get enough cash to fund all expenses throughout the duration of your studies. What’s more? It’s not a loan. So, no, you don’t have to get sleepless nights over how you’ll pay it off. Wouldn’t it be nice, seriously? Think about what you could do with a computer science or law degree from a world class university. Now, what’s the catch? Let’s just say you don’t pay anything until you complete your studies. And when you do, the funder gets 10-16% of your salary for 10-15 years. And that’s it. Yes, that’s it. Here’s an example. Assuming a high-quality but affordable European university costs $80,000 to complete an undergraduate degree. In the best case scenario, you get a job that pays $75,000-$90,000 per year. 16% of that amounts to $14,400. If the maximum payback expected by the funder is $150,000, this could be paid off in 10 years. It works out for everyone. Students get world class education with high-earning ability and funders get returns on their investment averaging 10-15% per year. After the first few years of entry level earnings, the salary and allowances of workers dramatically increase, thus increasing their ability to pay off the funds earlier. 

Sounds good so far? So, why hasn’t this been deployed at scale?. The idea of an ISA isn’t entirely new. However, the increased conversations around America’s student loan debt crisis has spurred calls for alternate funding arrangements that don’t cram debt down students’ throats regardless of their earning ability. In the case of an ISA, if students do not get high-paying jobs at the end of school, they aren’t under obligation to pay back the funds. This is part of the risk borne by funders. However, he who seeks returns should also accept certain risks, right? You bet. What’s more? The above arrangement could be tweaked depending on the risk tolerance level of each investor as well as the peculiarities of each geography. What’s important is that ISAs add a credible option especially for students in developing countries for whom out-of-pocket financing for universities is either not available or a major burden. Furthermore, it creates a potential worldwide investment vehicle with above-average returns for investors. The above structure could be securitized and sold at scale to investors thus massively increasing access to education for bright students from low-income countries/homes. And it could become a multi-billion dollar industry. Already, a number of companies such as Edly, AltSchool Africa and Lambda School as well as universities such as Purdue have started along this path. But there’s still a long way to go.  

Conclusion 

High education cost remains a major challenge for gaining access to education, especially post-secondary education. Pure vanilla student loans, while useful, have their drawbacks since the interests of lenders and students are hardly aligned. On the contrary, if ISAs are well structured, they could help unleash access to world-class education for students in developing countries as well as developed countries. What’s more, they align incentives. If I sponsor you, I’ll do whatever I can to see you become successful. If that means helping to raise funding for your final year invention or getting an investment banking job, I’d be happy to do it. 10% of your $1 million salary or dividend is good for you. And me too. 

Admittedly, it’s not all roses. There are concerns that the numbers-focused structure of ISAs might lead to a biased focus on high-earning sectors like technology and finance, to the detriment of less-lucrative (but very important) fields. That’s quite a concern. But what’s the alternative? The millions of dropouts who cannot afford high-quality education for lack of funding and/or fear of inflexible loans.

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Disclaimer: This information in this article is NOT investment advice. It is intended for information and entertainment purposes only.

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