(Photo: Diego Delso)
It's called an income-share agreement (ISA). Selected students at Purdue University in Indiana can offer shares of their future earnings in exchange for money for tuition now. If a student earns little after graduation, the shares pay off little. If the student earns a lot of money, the shares pay off more. So investors are speculating on the future earnings of Purdue students.
The Washington Post describes the system:
Awards will start at $5,000 and will take into account a student’s cumulative debt. Students would repay the debt during the years immediately following college based on a fixed rate linked to their expected income, a gamble that could save them thousands of dollars as compared to traditional loans but also could cost them far more if they land high-paying jobs. […]
Income shares do not function like traditional debt in that there is no explicit principal balance or interest. Purdue created an online comparison tool that lets students plug in their major, credit hours and expected graduation date to analyze repayment terms based on projected earnings.
A history major, for instance, with a $10,000 ISA would be expected to pay 3.72 percent of his salary for nine years, according to the comparison tool. The income share would be fixed, even though the calculation assumes an anticipated starting salary of $34,000 that would grow an average $1,590 a year the first 12 years out of school.
At the end of nine years, that history major would have paid back $14,265 on the ISA. If that same student were to get a $10,000 bank loan at 9 percent interest without a co-signer, it would cost $16,684 to repay the debt in a standard 10-year term, according to the tool; the ISA in that case would give the student a savings of more than $2,400.
-via Marginal Revolution