BizVoice March/April 2016

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March/April 2016 – BizVoice/Indiana Chamber 31
we are successful, over time we anticipate we
could have outside investors who are seeking
return on their capital who would become a part
of that fund. They could buy down the position
initially taken by the foundation. But the
foundation will initially be the primary issuer of
the ISAs.”
ISAs in action
While ISAs have been used in other countries,
there may be little to learn from that, according
to Akers.
“We’ve seen them used in the private market
in some South American countries,” she observes. “It’s
a really small scale and they have a dramatically
different system of higher education finance there.
So I’m not sure how many of the lessons are
applicable here.”
She also notes Yale University attempted a
version of the ISA (in the 1970s), “and it didn’t
work out particularly well, but there were some
differences in how that program was arranged.”
And while the potential savings and financial
benefits for students will be revealed in time,
Akers contends a potential benefit for ISAs is a
psychological one.
“In general, people are happier when they
have less risk,” she points out. “The innovation of
the ISA allows for mitigation of more risk, so it’s
natural there would be a preference for that
product over a loan product. However, there’s a
cost. Just like other insurance policies, there will
be a premium built in for that insurance. So do
people still favor a financial product that has an
insurance component, or do they prefer a straight
loan? It’s really an open question.”
Another potential benefit, Edelman shares, is
that an ISA can be extended to many students and
“does not focus at all on the student’s zip code or
the family’s assets.”
“What it focuses on is the expected future
fruits of the student’s labor, and that focus of how
the decision is made to extend the agreement will
open up this financing source to many students
from many types of backgrounds,” he elaborates.
“Many people who write policy thoughts on this
topic do believe the hypothetical first-generation
college students may need to borrow from private
loans or Parent PLUS loans, and those students
could value the downside protection on the
income outcomes (used in ISAs) post-graduation.”
Getting critical
One critic, former White House education
advisor (under President Obama) David Bergeron,
tells The Wall Street Journal, “It feels icky to me.”
He contends ISAs could become predatory or
undermine the federal financial aid system.
DeSorrento, however, rebukes that sentiment and
believes the administration actually favors this
concept in the broad sense.
“ISAs are a progressive idea,” he states. “If
you look at how the Obama administration has
reshaped federal student lending, this idea has
completely won there. They’ve moved to Pay As
You Earn (PAYE) as their favored payment plan
for student loans on the federal level, so the
Obama administration has endorsed it. We do it
without a government subsidy or government
involvement, so it’s a private sector thing that
people can opt into.”
It’s also been argued that ISAs embody a
form of indentured servitude or they could push
students toward STEM fields with higher earning
potential – potentially neglecting arts and other
courses of study. Edelman understands the
contention, but believes “it’s predicated on a false
economy.”
“What we’re really talking about is replacing
a portion of that capital that has financed a
student’s education with an ISA,” he asserts. “That
allows that lower income-expecting graduate a
buffer so if they have an event happen in life or if
their earnings are below expected levels, it
provides a very different financial instrument to be
part of the capital used to finance their education.
So the false economy people jump to when they
believe ISAs might create some dystopian social
engineering at a university is where I think they
don’t understand the actual economics of the
existing financing of an education.”
Moving forward
ISA advocates are currently supporting
attempts at government regulation. Indiana
Congressman Todd Young has proposed legislation
to clarify the tax treatment for students and put in
place robust consumer protections.
“I think having regulations at the federal level
would be extremely helpful for the pilot program
Purdue is contemplating,” Edelman concludes.
“It’s unlikely we’ll get such legislation in 2016, so
one decision we’ll have to make is if we’re willing
to proceed with our pilot without the guidance
that would come from Rep. Young’s legislation or
other national legislative measures.”
In a recent interview with the Indiana
Chamber (see more on Page 16), Daniels says the
potential for ISAs is “exciting,” and he’s eager to
see if the market demands such a funding mechanism.
“It could be fascinating too if it got to some
sort of scale,” Daniels asserts. “You would have, in
essence, portfolios of students … the low risk of
an electrical engineer not being able to meet the
obligation could be merged with the possible high
risk the philosophy or theater major might seem to
incur. We will try to get the program on offer as
early as March 2016 – and start to find out.”
RESOURCES: Beth Akers, Brookings Institution, at | Brian Edelman, Purdue Research Foundation, at | Tonio
DeSorrento, Vemo Education, at
“It’s a loan in that it’s allowing
students to borrow money
from their future selves, and
an insurance policy because
if it turns out the students
don’t do well financially,
they’re not on the hook
anymore for that liability. It’s
the insurance piece that I
think is the necessary
innovation at this point.”
– Beth Akers
Brookings Institution