Purdue’s Fintech Experiment: An Alternative to Pricy Student Loans
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“Back a Boiler” fund created by the Purdue Research Foundation for this purpose.
“Boiler,” short for “boilermaker,” is a nickname for Purdue students that originated with the working class origins of early attendees at the state school, which was founded in 1862 as a land grant college. The legend is that the school recruited its athletes from the ranks of boilermakers, or other strong, blue-collar workers such as stevedores.
“Boilers” who sign income sharing agreements will make payments to the “Back a Boiler” fund once they start working.
Edelman says Purdue’s core mission—keeping costs low while delivering a high quality education—dovetails with the goals of the new income sharing agreement program. Undergraduate tuition for Indiana residents has been kept down to $10,000 a year, and 2017 graduates will not have seen an increase over their four years on campus, he says.
Even so, some students can’t meet Purdue’s relatively modest charges through scholarships, grants, and federal education loans alone. Edelman says all those sources should be tapped before students and their parents consider other options. (The interest rates on federal student loans range from 3.86% to 6.41%, according to the U.S. Consumer Financial Protection Bureau.) But if there’s still a gap, he says, an ISA can be a better bet than a private loan with interest that starts accumulating while the students are still working towards graduation, and continues to accrue after they start working.
Still, Purdue graduates will repay more than the face amount of the tuition money advanced by the foundation. The repayment terms are set to deliver “some return on capital” for the Back a Boiler fund, Edelman says. The student payments will also cover the cost of hiring Vemo, and of legal services to deal with hitches that may arise, such as students who decide “to go to Nepal and not participate in the labor force,” he says.
Depending on the design of a school’s ISA program, an ISA may be preferable to private bank loans. A school can include provisions that protect students from mounting debt they can never repay by linking their payment amounts to their income levels; capping the maximum total repayment; and offering flexible payback options under certain conditions. In contrast, private loans may have interest rates as high as 16 percent, and variable rates that could rise over time, according to a college financing guide by the Consumer Financial Protection Bureau. The interest also starts accumulating while the student is still in school. And there may not be flexible payment options during setbacks such as a job loss.
At Purdue, the ISA repayment schedule will vary for each student. The most important factor is the student’s major field of study, because that sets their future income expectations. Students can figure out what they’d pay using the comparison tool on the Back a Boiler website. In general, students preparing for a higher-paid profession will pay a smaller percentage of their incomes, for a shorter period of time, than a student studying to qualify for positions in lower-paid fields. This may seem unfair, but a slice taken from a high salary yields a higher amount to repay a debt than a similar share of a modest income.
The Back a Boiler comparison tool shows the following potential outcomes: Computer engineering majors who finance $32,000 through a Purdue ISA would pay 9.38 percent of their annual incomes for 7.3 years. The expected average starting salary is $60,000. If such a graduate never received a raise—the opposite of Purdue’s predictions—he or she would repay $41,084.
Keeping all other factors such as class rank equal, English majors who finance $24,000 through an ISA would pay 9.84 percent of their annual incomes for 9.3 years. The expected average starting salary is $33,000. If no raises came during the repayment period, such a graduate would repay $30,199.
But Purdue predicts the incomes of both types of graduates would rise over time—though at a higher rate for the computer engineers. So their annual repayment amounts would climb accordingly.
The Purdue ISA program has some built-in flexibility. When Purdue students get a bachelor’s degree and then go on to graduate school, their repayment period doesn’t start until they finish the higher degree and begin working, Edelman says. If a graduate is working after college, but makes less than $20,000 in any year during the repayment period, payments are waived for that year, he says.
The Purdue program also caps the total amount repaid by graduates, even those who are wildly successful. A “rocket scientist” who lands a job on Goldman Sachs’ trading floor after graduation, and pulls down $1 million in the first year, would not have to repay close to $100,000 that year, Edelman says. The total repayment is capped at 2.5 times the amount advanced toward university fees. The stock trader who had financed $10,000 through the Back a Boiler program could write a single check for $25,000 and be done with repayments, Edelman says.
“Hopefully, we have created something students will want to use,” Edelman says of the ISA program. If hundreds of students sign up, it could be deemed a success, he says. “Then and only then would we think we’d created something of note.”
During the test phase, the Back a Boiler fund will only draw on money from the Purdue Research Foundation. But if the program’s track record of repayments looks good after three to five years, Edelman says, the foundation would approach alumni as well as institutional investors to chip in money.
But the foundation’s long-term aim is to prove that income sharing agreements are beneficial, and thus “prime the pump” for the creation of a ubiquitous market for ISAs, he says.