Kim Clark from Money describes a radical approach that some schools are taking to slow the growth of student debt:

Sheila Bair, who as head of the Federal Deposit Insurance Corporation from 2006 through 2011 was one of the few officials to warn of the 2008 mortgage crisis, is now hoping to forestall a similar mess in student loans. Her solution: a new kind of college funding option that would let students trade away a portion of future earnings for financial support now.

Here are the details of this student loan alternative:

She believes the option — sometimes referred to as “deferred tuition” or “income share agreements” (or ISAs) — is better than a high-interest parent or private loan because “it automatically adjusts with the student’s income, so it is always affordable. It relieves financial distress.” Graduates who lose their job or take a low-paying job won’t be hounded for ISA payments they can’t make, she says.

As for the downsides of this plan:

Delisle points out a downside of ISAs, however, noting that they tend to be more expensive for undergraduates than current federal student loans. Undergraduate federal loans currently charge interest rates below 4% — making them the lowest-cost funding available other than scholarship grants — and already offer income-based repayment options, he points out.

Have your students read the article (approximately 5-7 minutes) and then set up a debate or discussion to identify the pros/cons of each approach: student loans OR a percentage of your future earnings. Which would you choose?

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Interested in resources about Paying for College? Here’s an activity where your students will calculate the value of a college education.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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