Income share agreements, in which students receive tuition funding in exchange for part of their salary once they graduate, are catching on.
By Marlene Givant Star
Regulatory pressure, coupled with market forces, are prompting lenders to offer student loans tied to favorable job outcomes.
During the Obama administration, the U.S. Department of Education heightened its regulatory scrutiny of for-profit postsecondary schools for aggressively marketing loans to students who were unable to secure lucrative enough jobs to repay them. The regulatory pressure eased during the Trump Administration.
Nevertheless, the industry had already begun sharpening its focus on student outcomes and lenders have followed suit, based on interviews by Mergermarket with loan industry executives and school operators.
“Outcome-based financing as an alternative to traditional private student loans,” did not exist prior to now, according to one student loan executive.
Several student lenders have raised funding from venture capital firms as well as strategic players in recent months and have been scaling toward potential future exits.
MPOWER Financing, for example, a social benefit corporation providing loans to domestic and international students, was receiving interest from buyers and special purpose acquisition companies (SPACs), Mergermarket reported in August.
Manu Smadja, CEO of MPOWER, said the Washington, DC-based startup was looking to continue to double in size every year. In July, MPOWER announced a $100 million equity investment from strategic and institutional investors.
Also in August, Mergermarket reported that Ascent Funding, a platform for outcome-based student loans, was raising capital. Ken Ruggiero, chairman and CEO of Ascent, said the business was formed to focus on overlooked and underserved students and schools, including college juniors and seniors and adult learners whose parents don’t co-sign their loans. The students typically have no jobs and little or no credit history.
In addition to both cosigned and non-cosigned student loans for college and graduate school, Ascent provides consumer loans for technology boot camps and accelerated skills training programs.
Leif, VEMO Education, Ascent and other alternative lenders offer students income share agreements [ISAs] through which students are not required to pay back tuition loans until they find jobs. These lenders don’t require co-signers nor do they base loan decisions on the student’s family income or assets, but rather, on the future earnings potential of the student.
Ascent’s Ruggiero said tying student loans to jobs “changes the whole dynamic of the education ecosystem. Schools are forced to think about student outcomes first and foremost.”
This wasn’t always the case. Two large for-profit postsecondary education chains, ITT Technical Institute and Corinthian Colleges, collapsed under regulatory pressure from the Department of Education and accreditation bodies and many others have been investigated or closed, leaving the federal government on the hook for student loan forgiveness and legal remedies.
For-profit schools aren’t the only ones turning to income share agreements. Student lender VEMO launched a program to offer income share agreements to students at Purdue University in early 2016. VEMO continues to focus on traditional universities.
Other players, like Leif and Ascent, focus on boot camps, software engineering, data science and cyber security programs and are moving into the vocational field.
Schools embrace alternative loans
Postsecondary schools are looking to alternative loans as a way to serve more students. In June 2019, Mergermarket reported that Microverse, a computer coding training company that was looking to raise capital, was providing outcome-based loans to its students directly. Microverse trains coders through an online videoconferencing platform and helps them find jobs in software development, mostly at companies with international teams.
Microverse receives a percentage of the student’s salary for a period of time. Ariel Camus, founder and CEO, told Mergermarket the company was exploring the sale of its contracts with students in the form of income share agreements sold to a fund. This would be a complement to raising venture capital to finance the company, he said.
In September of this year, NexGenT, an information technology training school based in San Jose, California, began offering outcome-based loans when it shifted to live instruction but wanted to keep the base tuition of $12,500 affordable to students. It partnered with Leif in late 2019 and introduced live instruction in February 2020, Kao said. NexGenT was also working on a capital raise, the report said.
Meanwhile, on 7 October, Entity Academy, a Henderson, Nevada-based school exclusively for training and reskilling women in areas such as data science and software development, reportedly raised $100 million in financing from student lender Leif to be used to help students finance their Entity Academy tuition.
As a result of the increased access, Entity Academy\’s student body is more diverse than it was before the school offered such loans, Jennifer Schwab Wangers, founder and CEO of Entity, told Mergermarket in September.
Not every school is sold on the income share agreement approach. Anthony Lee, PhD, president and CEO of Westcliff University told this news service “we definitely thought about it but haven’t moved forward with it.”
In some cases, students might be better off with traditional student loans in terms of the ultimate cost. What’s more, universities need to be mindful of the regulations around how such loans are communicated to students.
“It’s very appealing for students but it depends on how much they pay back through the ISA,” Lee said. “Some do it better than others.”
Marlene Givant Star is U.S editor-sector coverage for Mergermarket and Dealreporter. She can be reached at email@example.com.