Student Loans Have Failed American Students, What About Income Share Agreements? | Crowdfund Insider

Student loans have failed American students is an understatement. American’s owe $1.4 trillion in student loan debt spread out among 44 million borrowers. With delinquency rate of student loans at 11.2%, the country is looking at a repeat of the mortgage crisis.  But what is the solution? What can be done to help students avoid debt traps and yet ensure there is a funding framework to support higher studies. The answer is in an innovative financing scheme: Income Share Agreements.

The Origination of the Concept

In the 1970s, Milton Friedman proposed that students should be able to fund their education in a manner similar to an ‘equity investment’ into the student. Understanding the value of Milton Friedman’s idea in the late 1970’s Universities like Yale experimented with the same and tried to implement it in their structure. But the scheme found few takers. After several debates and a lot of resistance, in 2014, Marco Rubio, the Florida Senator announced legislation to support Income Share Agreements. He and Todd Young reintroduced the Investing in Student Success Act (S. 268), legislation that would create a legal structure for income share agreements (ISA). The ISA basically allows an investor to fund the education of the student and in return, the student is expected to pay the investor a fixed percentage of his income (when he joins the job force) as returns over a pre-decided tenure.

An important highlight of ISAs is that a bracket is set out for the minimum and maximum income levels for accepting repayment from students.  Students are required to pay only if they meet the minimum requirements and up to a certain level to the maximum amount of their income. ISAs aim to allow entry of large-scale investors in the space and work with them to fund the education of students. The ISA’s differ from loans also in the sense that they are like a venture capital for students which is dependent on the future income of students. There is no interest charged and the calculation of the repayment amount is executed in a different manner. It is determined by the income of the student for a pre-decided period. In Universities like Purdue, the program has set an upper limit on the total amount paid at 2.5 times the amount received by the student.

Vemo’s Entry in the Industry

With the expansion of the education sector, there is a growing need for Universities to introduce income-based financing programs as an alternative to student loans. Vemo Education is one such technology company that works exclusively with higher education institutions to ensure effective implementation of such programs. Several colleges have partnered Vemo to start programs like Income Share Agreements in order to fund student education and allow them to pursue higher education without the risk of permanent indenture to student loans.

Set up in the year 2015, Vemo Education is the pioneer in providing assistance to post-secondary education institutions and its mission is to remove the complexities of the income-based programs for students. Vemo Education has tied up with Purdue University’s Purdue Research Foundation (PRF) to implement Income Share Agreements which will help the University to develop a large-scale institutional ISA program. The back a boiler program has been a resounding success and has raised awareness levels among other colleges wrt ISAs.

The Vemo Business Model

Vemo Education is helping higher education institutions design, develop and implement the ISA program.  It is providing access to best practices, technical support and access to capital for a quick and successful ISA launch.  Vemo has set out to leverage the experience that it has gained through the Purdue partnership and implement the ISA Model in various campuses across the United States. Recently they formed a partnership with….

Vemo is led by its founding team of professionals – Tonio DeSorrento (CEO), Bill Brosseau(VP higher Education), Jeff Weinstein (VP Credit and Analytics) and Renée Mang (VP Originations and Servicing). Venmo Education recently closed a whopping $ 7.4 million in seed funding in September 2017 with players like University Ventures, Third Kind VC, Route 66 Ventures and others participating. The company raised an initial seed round of $2 million from Learn Capital, University Ventures and others.

Other in the Business

Vemo Education entered the industry at a time when there was none venturing in the post-secondary education sector.  However, overtime there are companies who are trying to use the opportunity to build Income Share Agreements by partnering with schools. Goal Structured Solutions (GS2),13th Avenue Funding based out of California and Jain Family Institute based out of New York are emerging players in the field.

Pioneer

The ‘Back a Boiler’ Fund for ISAs introduced by Purdue University ensures that minority students or students in high-risk pools are not refused educational funding. In April 2017, Purdue University revealed that an amount of $2 million was issued to over 160 students by its research foundation under the program. It also offers a 6 months grace period to ensure students are financially settled in their new careers before having to start the repayment cycle.

Taking inspiration, many other colleges like Lackawanna College in Pennsylvania and Clarkson University in Potsdam have recently started creating ISA agreement funds in order to waive the tuition fees of students. The two colleges collaborated with Vemo Education Technology to provide the framework and the company was involved in approximately $23million  of ISA agreements in the year.

Conclusion

Any new innovation has its pros and cons. ISAs reduce the pressure on the student but is currently unregulated and can be misused against the very students it aims to benefit. But from a basic evaluation, it definitely appears to be a progressive alternative. It fills the gap prevalent in the existing student finance sector and provides a new innovative solution to a decades old problem. The ISA industry is expected to reach a market size of a billion dollars in the next 5 years.  Entry of companies like Vemo Education in the sector shall help in reforming the education sector for the better but it is only proper regulation which will allow institutional capital to make a dent in the trillion dollar student loan industry.

Stephanie Vaughan is Vice President of Finance and Operations at Privategrity, a venture-backed blockchain protocol for highly secure payments and messaging. Stephanie is an expert in tokenomics, security tokens and capital markets. She was previously a Director at BlockNext Ventures and a Director of Capital Markets / Development at StreetShares. A US Naval Academy graduate, where she majored in Quantitative Economics, Stephanie has a Masters in Business Administration, Finance & Economics, from Columbia University.

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