An Evaluation of Income Share Agreements: The Effect of Education Insurance Framing and the Nature of Adverse Selection

An emerging alternative to traditional student loans for low-income students are Income Share Agreements (ISAs). These education loans offer a form of education insurance for borrowers who may be unsure of the potential returns to college. With an ISA, instead of paying tuition or carrying a loan balance, a student agrees to pay back the lender a fixed share of their income over a set period of time in months where income exceeds a pre-defined minimum income threshold and up to a maximum cap. Once concern with these program is adverse selection; the market for ISAs could potentially unravel as students with higher risk of employment disruptions or low income sort into ISAs.
Our research partner is a non-profit, online university who piloted an ISA to juniors and seniors in certain majors starting in 2021. Students attending this university are more likely to be lower income and to be working adults. The University offered a survey to 8,000 soon-to-be-eligible students (this sample does not include participants in the pilot described), with an experimental component. This survey asked questions about students’ income outlook, risk preferences, and demographics and then randomized framing about the insurance properties of the ISA. This experiment will help ascertain the type of students that would choose a hypothetical ISA and the price elasticity of demand.