Last week, Sen. Marco Rubio (R-Fla.) unveiled legislation for what he called “income share agreements,” a possible alternative to student loans — and it just might work.
Under the terms of the agreements, investors would subsidize students’ college education in exchange for a portion of their future income over a specified period of time. The more money students earn, the more money they pay back to investors. In light of the fact that the average graduating senior has almost $30,000 in student debt, Rubio’s plan, created in conjunction with Rep. Tom Petri (R-Wisc.) is a welcome alternative that should ease the burden on students and create a new form of investment.
This bill, called the Investing in Student Success Act, is not a new concept. Companies like Upstart already exist, allowing investors to donate money in exchange for a share of the recipient’s income over a fixed period of time. Rubio’s proposal would provide a legal framework for these models, allowing them to become more readily available. Potential investors who have been deterred by the legal uncertainty behind these loans will now be more willing to invest. By opening these agreements up to more people, fewer students will require loans and leave college with crushing debt. In 2012, 71 percent of students graduated owing at least some debt. Rubio’s proposal could substantially reduce that number.
Furthermore, students who choose to go this route will likely end up choosing more economically efficient majors in college. According to a report from earlier this year, there is a substantial gap in salaries depending on major. For instance, the average starting salary for engineering majors ranges from approximately $50,000 to more than $100,000 depending on the specific area, and majors such as computer science, mathematics and economics also rank high. On the other end, the average music major’s starting salary is only about $35,000 and even by mid-career, they will only be earning an average of about $51,000.
It is therefore unlikely that investors will choose to invest in students majoring in music, drama, fine arts or other study areas with poor future earnings. It would not be a wise investment. Students studying those subjects have low future incomes, which means the investors will get very little back. As a result, students who want to benefit from this program will be forced to choose a major that will get them a high-paying job after graduation.
Rubio himself knows how big of a problem student debt can be.
The Florida Senator graduated law school with close to $150,000 in student loans and took 16 years to finally pay it off. He does not want other students to suffer the same experience he did. The proposed income share agreements will allow students to graduate college without owing massive amounts of debt, and to pay it back based on their earned income. It would also create a potential new profit area for investors.
Rubio’s proposal is sensible and would create a new avenue for college students to finance their studies. Congress should pass the legislation and enact it into law.
