I agree. The investors are purchasing an income stream from the students.
There are other schools also coming under fire with these types of deals. It’s not just Purdue. I think the problem is people don’t really understand what they are signing. When I took out loans for medical school and undergrad back in the day whatever they told me didn’t matter. All I heard was “sign on the dotted line” 
…
It’s almost like you need an impartial person to explain these loans /investments to people. They are confusing for a novice… No question about it.
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I think this is the key. I would imagine those pushing these plans on the students are inclined to make the product very appealing and aren’t really going into the weeds, gritty details, of how high the actual payback might end up being. An impartial entity could perhaps explain them more thoroughly and perhaps fairly?
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And because they aren’t loans, they do not have the Truth In Lending disclosures required by most consumer loans. Federal Student loans don’t have the same disclosures either, but at least they have a (minimal) training and explanations required before the money is released.
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gives new meaning to the term “Loan Shark”
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I agree but if this kid was engineering Purdue has a range of the amounts the students would make right out of school per major. Even just the average if used, then this student would have a better idea of what his “true” payment would be monthly. I just can’t believe this wasn’t done but don’t know… At first site the concept seems great actually… So I can understand the confusion. Most families have a hard enough time understanding what the COA at college is. Why are some rewards in financial aid offers actually loans and so on… It can get confusing fast.
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Guess I would want to see the school’s disclosures and the quiz that must be passed before the ISA is signed before I can conclude that disclosures are not sufficient.
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“Sure, I had access to all the terms of the agreement, and confirmed that I read and understood them when signing a legal contract, and was told I should review with an independent financial advisor, but now I don’t like it, so shame on you for forcing me to comply with it”.
is often a red flag. The full, correct facts will be interesting.
I’m pretty sure average Purdue Engineering salaries, and the math to figure the payments, are available.
The total payment to loan ratio is 2.5. Plugging numbers into the basic ISA calculation tool, for Engineering, currently yields a 2.31 ratio. The numbers from three years ago aren’t available, but I’m sure they can be accessed in an investigation.
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I bet if they came out and told potential candidates that were going to give you $10,000 and once you graduate in two years you’ll have to pay us back $25,000 over ten years that they might make it easier for people to understand what they’re actually signing up for. It’s easy to throw percentages and varying numbers at some people and confuse them. Not everyone is financially savvy. People can probably understand having to pay back two and a half times what they borrow though.
Reminds me of a “payday loan”. I’ll give you $20 today and you pay me $30 on Friday when you get paid. Of course there the terms are simply clear.
I find it strange that a future engineer could not figure out that this is a very bad deal… The math is not that hard - Algebra 2 at most.
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The math is not hard but knowing if it is a good deal is hard. I don’t think many 17 year olds know if a 10% ROI is good, if it is normal, if it is a scam (which I don’t think this is, but I do think for the most part it is a very tough deal). It also may be all that was offered.
My kids relied on me to tell them what to do. They’d never taken out a loan (they didn’t have cars until after college graduation), didn’t have high paying jobs where they could invest any money or even contribute to an IRA or 401k - they spent every dime they earned on luxuries like food and housing, occasionally some clothing or travel. I did their FAFSA and taxes.
One of my kids is an engineer and she asked me to do it. She had 10 different parts to her FA (scholarships, loans, grants). It was a lot for a 17 year old to deal with, I enjoyed doing the paperwork, so I just did it. Probably should have involved both kids more, but we took the easy route. Four years later, they learned when they had to do their own taxes.
I think they’d be really mad at me if I’d had them sign an ISA agreement. Glad they weren’t offered.
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In the article the mom said she encouraged her son to take the ISA and that they currently have 100,000 to pay off the current estimate of total garnishment. So many questions went through my head:
- If you’re a family that has $100k disposable cash, why would you agree to a 9 year, 10% garnishment of wages instead of a traditional private loan. This seems to be a well-educated family, so I’m not sure I quite buy someone not being able understand or research the terms. OR, are they going to pull it out of retirement plans to reduce a possible repayment of over $100k as his wages increase over time?
- Did they not qualify for a parent plus, which would’ve been 7% or private at a lower %?
3)Was their credit such that their rate for a private loan would’ve been significantly higher than the average loan % or the garnishment %?
4)Were they guestimating his salary would be closer to $65k instead of what I’m estimating is over $100k and gambled on the garnishment being lower than other lending options?
So many questions and not enough answers in this article, but I don’t think there is enough information to determine what actually happened in this case. I do, however, think there is an issue with lending in general, and there should be some investigation into advertising of these financing vehicles. We’ve always called these “indentured servant agreements.” The only time it makes any sense at all is if you have no other way of qualifying for loans, and you’ll make a good living wage after garnishment. I still don’t think it’s the best option though; it goes against my personal philosophies on borrowing. I do have physician friends who did the NHSC plan to pay for med school and family who did/are doing ROTC. Both programs require years of “payback” so to speak. You’re required to work for several years at a lower wage than market value to repay the investment. This is a similar agreement, except instead of the government being the financier, it’s private investors gambling on your future success.
I don’t think they are offering to pay 100k, but they tried to pay the original loan amount in a lump sum.
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I agree, but in that case the mother is thinking she should get the loan over the 4 years with no fees or interest (borrowed $40k, now wants to repay $40k). That of course isn’t fair to the investor who took the risk with the $40k that it would never be repaid, that the student didn’t get a job for 10 years or took a lower paying job.
For some student borrowers, these may be a good idea. If the engineer decided to be a teacher or a day care worker, 10% of the income might not even pay the original investment. If the student becomes unable to work? Good deal for the student, bad for the investor. There were several cases of parents who borrowed from the New Jersey state program (like parent plus where the parents are borrowing and liable) and the students died but parents still liable for the full loan amount.
Students and parents have to know the terms of the loan and who must repay it.
Unfortunately, most high school students are naive about risk and how debt versus equity or royalty investments work, and many of their parents are also. Probably also some of the investors as well.
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Again, I would like to see the disclosure that Purdue made and the quiz that the student needed to pass. May well be the case that they went through how it would work in good detail. At least that is what they should do. But without seeing that info, its tough to know. The assumption seems to be the student didn’t know or couldn’t have known. But I am not sure that is the case.
I did read through the materials on Purdue’s website, and I will say that the sample contract was one of the most vague and at the same time predatory contracts I’ve read in quite some time.
The “best” part of it (to me) was the advisory at the top suggesting an applicant should talk to a ‘trusted advisor’ before signing *. That alone let me (an experienced savvy investor) know that we were about to get into a financial product with extreme risk, not a loan. Do I think a 17-20 year old would have a clue? Nope, not even a little bit. And there were terms in the contract that I thought were flat out unenforceable but would, of course, feel quite coercive to someone foolish enough to sign said contract.
I also found it fascinating that residents of Illinois are not able to use this product at all, if you attend Purdue as an Illinois residents - you are ineligible. It made me wonder what type of consumer protection exists in Illinois that makes this product literally un-useable.
The terms of the contract are completely one-sided, the recourse non-existent, the amount of control over your financial information (including literally 9-10 years of your complete tax returns) breathtaking. It is the kind of contract I can only imagine 18-22 year old thinking might be a good idea…because it is a terrible contract. It was breathtaking in how bad the terms are.
*If anyone sees this kind of advisory at the top of any contract/financial product, unless you actually have real, independent financial advisors (including tax advisors…and I don’t mean the person presenting you with the ‘opportunity’) run away. If you don’t understand the warning implicit in that wording, you shouldn’t get involved with that financial product.
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I used to work in high risk lending and Illinois, at that time anyway, had very few consumer protections on LENDING, but this is INVESTING. I suspect there is either a court ruling that makes this type of agreement unenforceable or a law that does, and therefore the investors aren’t willing to take the risk of not being able to sue for enforcement.
Illinois officials who supervised our lending offices used to come in, eat donuts, make long distance phone calls (back when they were expensive), look at THREE loan files and leave. Sometimes this took a week, depending on how much they liked donuts and how many long distance phone calls they needed to make. Minnesota inspectors would look at EVERY loan made since the last inspection and write up detailed reports on each on. We had a lot less fraud from customers or employees in MN than in IL. Go figure.
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What got me there was the first statement in the sample contract link:
THIS IS NOT A LOAN OR CREDIT.
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And that second line, which seems like double talk to the extreme:
THIS IS NOT AN ASSIGNMENT OF WAGES. It totally is!