Creative Alternatives to Taking Student Loans
A look at some newer ways to address the problem of student-loan debt.
Student loans, both federal and private, are an essential way that many students fund their higher education needs. According to data from the College Board, the average cost of a year of tuition plus room and board for an in-state student at a public university was over $19,000, and private college was nearly $44,000. And according to Mark Kantrowitz, publisher of Cappex.com, the average 2016 graduate has $37,000 in student-loan debt.
Federal loans, both subsidized and unsubsidized, have low fixed interest rates and do not require a credit check. But for some students, they're not enough: The yearly limits are $5,500, $6,500, and $7,500 per year for the first, second, and third years (and beyond) of undergraduate college education, respectively. Only $3,500, $4,500, and $5,500, respectively, of that yearly amount can be in subsidized loans, the terms of which involve the U.S. Department of Education paying the interest for you if you're in school at least half-time and for a limited grace period after you leave school.
These low limits have paved the way for the private student loans and the Federal PLUS Loans (which are available to graduate students and parents of undergraduate students) to fill in the gaps. However, borrowers who don't have great credit may not qualify for a PLUS loan, and borrowers without sterling credit may end up having to pay higher annual percentage rates for private loans.
Overall, student loans in the United States total more than $1.2 trillion by most estimates, and presidential candidates are getting the message that they need to address the problem.
But outside of the realm of politicians' promises, some other creative solutions that could help address this problem have come on the scene recently. None of these alternatives to traditional student loans is particularly common at the moment, but in the coming years, they could become more widely implemented.
Income Share Agreements
In April 2014, Sen. Marco Rubio, R-Fla., and U.S. Rep. Tom Petri, R-Wis., introduced the Investing in Student Success Act, which "would create a legal framework where individuals or organizations can provide students with money for school in exchange for the student agreeing to make payments linked to their income for a set period of time after graduation," according to Rubio's website. This type of agreement is known as an income share agreement.
As opposed to a traditional student loan, which often has a fixed monthly payment, an ISA allows the student to receive the funding while in school, and then after he leaves school, he will pay a fixed percentage of his income over a fixed number of years. Essentially, this allows private investment groups to invest directly in an individual student; many believe this could be a way to make education more affordable and more accessible. (A version of this idea was originally proposed by economist Milton Friedman in the 1955 essay "The Role of Government in Education.")
Among the drawbacks, it's possible that higher-earning graduates may end up paying more to the fund than they would if they had taken on a more conventional loan.
But among the benefits, these types of agreements have no interest rates and provide strong downside protection for borrowers. Essentially, a graduate would always be able to afford the payments because they adjust to his level of income. Therefore, an ISA recipient is required to pay the agreed-upon percentage of post-graduation income for the prescribed term of the contract, even if that means he has not fully repaid the loan.
One such program, Purdue University's Back a Boiler ISA fund, which will become available to approximately 400 students in the 2016-2017 academic year, has instituted not only a minimum income threshold, so students who use the program will not pay if they do not meet a minimum income level, but also a maximum cap, so that those who earn a substantial amount of income will not pay above a certain maximum amount.
For more on income share agreements, see this article in U.S. News and World Report.
Pay-It-Forward (Oregon state legislature 2013)
The so-called sustainable financing Pay-It-Forward legislation, which was first passed in Oregon in 2013, if implemented, would enable students to attend public college tuition-free, but in the future they would pay a fixed percentage of their income into a fund that would pay for future students' college tuition. The program has not yet been instituted due to lack of funding, but it remains a possibility.
Student Loan Repayment as a Company Benefit
While many companies offer a tuition-reimbursement program to employees, a newer and much-discussed benefit is loan repayment. But it's not an especially common item on most companies' benefit menus (only 3% of companies offer this perk, according to the Society of Human Resources Management).
One thing to keep in mind, however, is that as it currently stands, student loan repayment benefits are treated as taxable income subject to income and payroll taxes. (See this Wall Street Journal article for more.)
According to the Society of Human Resources Management, "although Congress is considering legislation that would add student loan repayment to Section 127 of the Internal Revenue Code (which allows employee benefits to be paid with pretax dollars), only time will tell if this legislation will move forward."
There are many schools that offer "no-loan" financial-aid policies, wherein low-income students (those whose families make less than a certain amount, such as $40,000 per year, or those eligible for the federal Pell Grant) eliminate loans from the financial-aid package. (Often, tuition needs are met through grants and a campus job.) Many others offer caps on student loans. The first university to offer this was Princeton University in 1998-99; since then, more than 70 colleges and universities have followed suit. Click here for more.
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