Wasn’t sure where to post this story about the Purdue ISA “Back a Boiler” loan program, but did a search and saw it mentioned here.
Take heed. Student loans: Mom slams Purdue ISA offering as son deals with nearly $100,000 in debt
Students (and parents) should identify college options where they will not incur any debt at all - ZERO. If debt is a part of your college plans makes sure you understand how you will be paying it off. No surprises, no remorse, no Yahoo News articles 
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First, this article is very poorly written and doesn’t accurately explain what an ISA is.
I’m confused as to how his $40+k loans turned into $100k in 3 years. He took loans in 2018 and 2019. Did he graduate in 2020? 2022? Do the loans accrue interest during the time the kid is in school? Was that not clear? What information does the “quiz” the borrowers are required to take actually convey. Did the mom have to take it too or just the kid?
“That $39,864 loan ballooned to $99,660.50 as of January 2022”
I find these student loan articles to be very disingenuous because when the facts actually come out it’s never the way it’s originally portrayed in the article. For example, the mom can pay off a $100k loan in a lump sum but encouraged her son to take out debt in the first place? Did the mom not review the terms of the loans before she encouraged her son to take them?
And the colleges need to be held accountable as well. There are many threads on CC that have discussed the issues regarding colleges’ less than clear presentations of financing COA. Where is the DOE on this? It’s not difficult. List loans as loans. State they’re loans and students/parents MUST repay them with INTEREST. Not some gobbledygook about ISA or “back a boiler”. List grants as grants and state they’re free money/gifts that are NOT repaid.
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I admit I only skimmed the article, but how did 40K in loans more than double to 100K owed, in two years?
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Agree!
It’s not technically a loan. They front you the money in exchange for a percentage of your income after you graduate and get a job. The amount you pay back is higher if your income is higher. This is certainly predatory. The numbers they give showing comparisons to regular loans aren’t telling the whole story.
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There’s a comparison tool here where you can plug in hypothetical information and see what the payback would look like at different income levels. I don’t see how this program benefits a student. Someone is making a ton of money off of this.
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The lender is trying to claim it’s not a loan, and it can’t be paid off in a lump sum? It sounds more like indentured servitude.
I had to take out loans to get through college, plus grants, scholarships, plus an almost full time job, etc… but those federally subsidized student loans used to cover a state school education. Now those capped loans don’t even come close.
I feel very fortunate that we’re able to put our kids through college without loans, but not everyone is so fortunate. This article is alarming.
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So the repayment is calculated on the student’s income instead of a repayment schedule based on a fixed interest rate? In other words the bigger your salary the more you pay or it just seems that way because 10% of $50,000 is less than 10% of 90,000?
Seems like it would only help those students who end up in low paying jobs. Or can’t find a job for a long time.
After probably about a month of looking at it, digging into it and thinking about it, I decided it was going to be a better option for my senior year,” Herbert said.
Herbert signed up for what’s called an “income share agreement,” also known as an “ISA.” Investors would pay for her last year of school, and in exchange they would get a stock in her future earnings.
“There is no interest, there is no danger of what you owe exploding in the background,” Herbert said
With an ISA, there’s no set number that Herbert owes. Instead, she agreed to pay a percentage of her income for a set number of months, in her case, 10% for 104 months. If she ended up earning a lot she’d pay back more money. But the ISA guarantees that if she struggles, she wouldn’t be on the hook for thousands of dollars that keep growing with interest.
“So the risk shifts entirely to the investor,” said Purdue President Mitch Daniels. “If things don’t work out well for the student, the amount they owe goes down.”
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So it’s nothing different than the original deal. The student essentially sold a portion of his future earnings to an investor, in exchange for some tuition. In other words, it’s not that he owes twice what he borrowed - it’s that he’s earning enough that the percentage of his current earnings, were it to continue at that level, would amount to 100K over the ten year term. If his earnings increase, he’ll pay more. If his earnings drop, he’ll pay less.
Personally, I don’t think that this is a smart deal, especially considering the high salaries for Purdue engineers. Did the son take this out without consulting with his parents? They’re now offering to pay off the current expected debt in a lump sum - but that’s not the deal he made. He made the kind of deal that a potential star makes with an agent - you make me a star, and I’ll pay you a percentage of my earnings going forward, for a term or indefinitely. I wonder why they didn’t just fund his education three years ago.
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Yes, being based off of a percentage of future income it can be a substantial amount. In the end it’s way more expensive than a loan would be unless of course you don’t find a job for like 12 years. They are taking advantage of these students naivety and inexperience.
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I agree. I only shared the article because I was surprised at the dollar figures and thought those who are considering it should be aware. We can learn from others.
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It’s definitely good to put it out there for others. Many come to this site looking for information and this thread might save someone from making a mistake.
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Not at all. Taking a loan is debt financing, whereas taking a percentage of income is equity financing. Equity financing incurs greater risk, and therefore has greater reward on average.
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I would think that a loan also has a level of risk equal in this case.
I would also think that by limiting the program to sophomores and above they reduce the risk of drop out. I also see reduced risk in a graduate from Purdue in getting a job. It looks like a really safe investment comparably and in the end the return on investment is very high.
I just hope they are fully explaining the terms to potential applicants. In this case, from the article, it doesn’t seem like that was the case. If it’s being whitewashed and made to sound not as extreme as it appears then that is inappropriate in my opinion.
Talk about “buyer beware.” This is going to turn into a big lawsuit against Purdue. I’m assuming there’s a lot more to this story, but let’s be honest…this is a dirty predatory loan, and it’s worse than the subprime mortgages of 2007. Locking someone into a liability that forces indefinite payments you’re not allowed to payoff, is either illegal, or should be illegal. At least with a subprime mortgage, you can sell your house, or declare bankruptcy. With this you can do neither. So my advice, if the school tries to sell you this kind of loan, you should reconsider if the school is right for you.
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Per the OP article:
Sounds like they are explaining the terms to potential applicants. Though the applicants may not remember that when it comes time to pay.
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They will counter that it is not a loan. While I do not agree with this in anyway - is it really any different than our current graduated tax system? Basically, the more you make, the more you will pay. Unfortunately, this student will also likely be in a higher tax bracket as it sounds as though he is making a good salary based upon the payoff amount. Therefore, he will be doubly hit financially by this “more you make - the more you should be able to pay” situation. Also, as this is not a “loan” in the technical sense, he also may not be able to write off the interest paid on his taxes. For those of you upset by this, do you feel the same way about our graduated tax structure?
Greater expected reward and higher risk for the investor. But the opposite for the student – greater expected cost and lower risk for the student. I.e. the student avoids big unpayable debt in the worst case, but ends up paying more in the average and best cases.
Of course, the problem is really that some students and parents (and probably some investors) are poorly informed about the risk and cost / reward tradeoffs between debt and equity financing.
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I think of it is more royalty(revenue) financing. For Shark Tank fans, Kevin O’Leary likes to do this type of deal.
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