Vanderbilt professor proposes a different way to finance college

An investment vehicle would help replace student debt — an idea that has Congressional support.

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Jim Patterson
Vanderbilt University
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Apr 15, 2014

Miguel PalaciosAn innovative method of financing college loans advocated by a professor at Vanderbilt's Owen Graduate School of Management has support in Congress.

Under Income Share Agreements (ISAs), investors finance a student's education in exchange for a percentage of the student's income after graduation for a fixed number of years.

"An ISA has students pay more if they are successful in exchange for paying less if their educational investment does not pan out," writes Miguel Palacios in a report for the American Enterprise Institute.

"In addition, because ISA investors earn a profit only when a student is successful, they offer students better terms for programs that are expected to be of high value and have strong incentives to support students both during school and after graduation."

Palacios' co-author is Tonio DeSorrento, deputy general counsel of Social Finance, Inc. Palacios, assistant professor of finance at Owen Graduate School of Management at Vanderbilt, is co-founder of Lumni, a company that has used ISAs to help students finance their educations in multiple Latin American countries and the United States.

Sen. Marco Rubio, R-Fla., and Rep. Tom Petri, R-Wis., are partnering to champion the ISA concept in Congress. Rubio plans to introduce legislation that would give students and parents more information about the performance of graduates of various institutions and programs. That data would help companies and individuals make more informed ISAs.

An ISA would eliminate problems that have become cumbersome under the federal student loan programs that many students utilize to finance their educations, Palacios said.

"Because they are available to students with virtually no assessment of the students' ability to repay, federal loans likely exacerbate problems with overborrowing, putting students and taxpayers at risk and contributing to tuition inflation," Palacios said.

Palacios suggests several steps for lawmakers to promote ISAs:

  • Provide legal clarity regarding the treatment of ISA contracts.
  • Put reasonable loan limits in place to curb unlimited borrowing through the federal program.
  • Modify the federal student loan program to simplify the repayment process and allow it to be paired with ISAs.
  • Allow for the collection and dissemination of data on labor market outcomes of graduates from different institutions and fields of study.

Vanderbilt Owen Graduate School of Management is ranked as a top institution by BusinessWeek, the Wall Street Journal, U.S. News & World Report, Financial Times and Forbes. For more information about Owen, visit www.owen.vanderbilt.edu.