ISAs: Loans or Debt Traps?

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Recently, I came across a potential solution to redress the financial hurdles that limit access to tertiary education. This solution is called an "Income Sharing Agreement" (hereinafter ISA). According to Batya Bankers, ISAs are like equity investments. 

An individual ... allows investors to buy ‘shares’ in their future earnings while contributing to social value through sustainable empowerment. Students receive interest-free funds to cover their tuition fees on condition that they agree to pay the lender a specified fraction of their future earnings. By grouping these investments in individuals, lenders are able to offset risks as returns from higher earners hedge the potential losses from lower earners.  

Based on this definition, ISAs seem perfectly positioned to connect individuals in need of vast resources, with individuals controlling those resources. They provide vulnerable people without the means to earn or secure collateral - what you give a bank in exchange for large sums of money - loans. They ground the loans in the future promise of an individual; thus affirming that individual's dreams and capacities. Additionally, ISAs create a support system for their beneficiaries; bringing together different stakeholders who are invested in the success of the would-be student. 

I am, however, deeply troubled by ISAs for a number of reasons. 

First, for their inherently predatory nature. How can you tell me that someone paying for your education, will not attempt to use that to control your life? This happens with parents, who threaten to cut their children off if they study the 'wrong' course or act in a manner they disapprove of. This happens with scholarship recipients, who are barred from acting in certain ways or are obliged to attend certain events. What is to say that ISAs won't perpetuate these predations? Especially when the target group - fresh-faced 18 year olds with little-to-no prior interaction with the finance system, remains the same?

Additionally, while ISAs provide up-front funding for a degree; such funding is pegged to one's future earnings. This suggests that the more an individual is likely to earn, the more money they are to receive. This will drive students to high-earning degrees that may not be socially beneficial or valuable. Right now, we need teachers. We need nurses. We need mental health professionals and social workers. We need artists and scientists. But these fields are not high-paying; even though earning a degree in any of these fields can be. Therefore, won't ISAs exacerbate the ongoing crises we are experiencing as a result of labour shortages in critical areas? Will ISAs twist the incentives behind getting an education? Or, perhaps more accurately, will they cement our current profit-seeking incentives motivating, and undermining, university attendance? 

Third, ISAs cannot know which jobs will be high-earning or not. The tools used to calculate future earnings are based on older, generalized salary data that are sometimes lower than actually reported salaries to project estimated earnings. This not only affects the amount of money that will be available to the intended beneficiary, but it might also skew perception in favour of ISAs; when compared to other financing options. Additionally, older generalized data may not account for changes in the labour market that might devalue a role's relevance over time. 

Perhaps the biggest issue I have with ISAs is that loan forgiveness policies do not apply to ISAs. Loan forgiveness is when the person loaning you the money writes off the debt; or minimises the amount. This, effectively, traps a student into paying back their debts; irrespective of their current capacity to do so. 

At this point, you'd expect me to dismiss ISAs outright. However, such a dismissal would be a product of my privilege. Once again, I cannot forget that I am writing from a position of privilege; with enough distance to allow the criticisms I have provided to dismiss ISAs as a legitimate source of funding. Many people do not have this luxury. Therefore, if we agree that the basic idea of an ISA is an idea worth exploring, how do we minimize the risks? How do we turn ISAs into a viable option, and a tool for catalysing the promise of education?

So far, I have yet to see anyone provide an answer. 


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