Institutional background. Purdue University is a public university located in northwest Indiana with about 45,000 students of which 33,500 are undergraduates. Slightly more than 50 percent of the under- graduate students are Indiana residents and about 14 percent are international students. In-state student annual tuition is $10,000 and the total cost of attendance is $23,000. Out- of-state domestic student tuition is $29,000 and the total cost of attendance is $42,000. International student tuition is $31,000 and the total cost of attendance is $46,000. The average SAT score for undergraduate students is 1260 (28 ACT) but varies con- siderably by major. Potential students apply to and are accepted by colleges within the university and the admissions cutoff differs significantly by college. More than 40 percent of undergraduate students begin in engineering or science, but many switch to a major in an- other college after the first year. While not impossible, administrative hurdles make it very difficult for students to switch into engineering or science majors if they were not initially accepted into those colleges as a first-year student. Similar, but less insurmountable, hurdles exist for many other majors including those in the business school. Purdue’s ISA program is called “Back a Boiler.” The first year of the ISA program was the 2016-2017 academic year and the university offered the program to students in the final few months of the prior school year and over the summer. Interested students submit an application which includes permission to run a credit check. If the student has a bankruptcy or is currently in debt collection, they are disqualified. This is the only information the university requests as part of the credit check. To be eligible for the ISA, students must have remaining financial need after exhausting merit-based scholarships, grants, and opportunities for direct subsidized federal loans, direct unsubsidized federal loans, and ▇▇▇▇▇▇▇ loans. Purdue presents its ISA program as an alternative to a direct PLUS loan or a private student loan.4 Direct PLUS loans have higher interest rates than the other federal student loan options and while the money goes to the student’s education, it is the parent who is the borrower and responsible for payments. Private student loans have the highest interest rates of all student loan options. While ISAs are similar to income-based student loan repayment, the fundamental differ- ence is that ISAs have no loan balance that the borrower is paying down.5 In the language of ISAs, the “funding amount” is the amount of money the student receives, the “income 4Since the financial crisis, private student loans are less common, though there are still several large providers that are active in the market including Chase, CitiBank, ▇▇▇▇▇▇ ▇▇▇, and ▇▇▇▇▇ Fargo. 5In an effort to reduce the default rate, the US Department of Education has introduced several income- driven repayment plans where monthly payment are reduced to a certain percentage of discretionary income for an extended period of time or until the loan balance is repaid. See ▇▇▇▇▇▇▇ et al. (2018) for a comparison of student loan income-driven repayment plans and student income share agreements. share” is the fixed percentage of earned income the student agrees to pay for the term length after a grace period, and the “payment cap” is the maximum amount the student would be obligated to pay in case of very high earned income. Payments are deferred if the participant exits the labor force or reduces hours of work below full-time employment and therefore the term length is extended up to the “deferment cap” of a specified time period. If earned in- come drops below the “earned income threshold” while the participant is working full time, the participant makes no payments and the term length is not extended. The amount the student pays back may be more or less than the funding amount and there is no way to buy out the contract other than simply paying the payment cap. If ▇▇▇▇▇▇ finds the applicant to be eligible, he or she is sent a disclosure that describes the terms of the ISA program (see Figure 1). Prominently located at the top of the disclosure is the statement “this is not a loan.” The disclosure also provides payment illustrations which indicate the insurance aspect of the ISA. This framing of the ISA may have a large effect on participation (▇▇▇▇▇▇▇ et al., 2018). Eligible students also typically receive a disclosure for a direct PLUS loan and most students who do not participate in the ISA program choose a direct PLUS loan instead. In the Purdue ISA program, the income share is between 2.5 and 5.4 percent per $10,000 of funding for a term of between 80 to 116 months. The income share percentage depends only on the student’s major and year in school. Seniors receive the most favorable terms and sophomores receive the least favorable terms. This reflects both the longer grace period for sophomores and the increased probability of switching to a lower- paying major. The disclosure describes a “take it or leave it” funding offer. Students who choose to participate have their university account credited with the money at the beginning of the semester and receive a check for the portion above the remaining university tuition and fees. Student who do not accept the offered ISA either take a direct PLUS loan, a private loan, or self-finance their educational expenses in excess of their other federal student loans. In the first two years of the program, the only way a student could learn the applicable income share and length of the agreement was by submitting an application and receiving a disclosure. No information about the terms was posted to the ISA program website and students making inquiries were simply told to apply. This lead to a large number of students applying for an ISA and then choosing not to participate once they learned the terms. Before the third cohort considered applying, an income share agreement calculator was posted to the program website making it possible for interested students to see what terms they would be offered if they applied. This lead to a strong decrease in the number of applications from students who decided not to participate. My strategy for identifying adverse selection into the ISA program is based on the application being the only way to learn the ISA terms. My assumption is that all potentially interested students submitted an application. Participants make no payments while they are in school nor during the 6 month grace period immediately following graduation or choosing not to continue at the university. After graduation, participants provide the university with a pay stub to determine the monthly payment. The monthly payment is recalculated every year in June after Purdue’s servicing partner receives the W-2 and 1099-MISC from the IRS.6 The payment cap is 2.5 times the funding amount. If annual earnings are less than the $20,000 earned income threshold, the participant makes no payments. Purdue extends the term for each month that is deferred, unless the participant is unemployed and actively seeking employment or is working 35 hours per week or more and earning less than $20,000. This means that students who exit the labor force to go to graduate school or to care for family members delay the payment term up to the 60 month deferment cap. Participants are allowed to sign up for subsequent years of funding through the ISA up to an income share cap of 15 percent across all income share agreements.
Appears in 1 contract
Sources: Income Share Agreement
Institutional background. Purdue University is a public university located in northwest Indiana with about 45,000 students of which 33,500 are undergraduates. Slightly more than 50 percent of the under- graduate students are Indiana residents and about 14 percent are international students. In-state student annual tuition is $10,000 and the total cost of attendance is $23,000. Out- of-state domestic student tuition is $29,000 and the total cost of attendance is $42,000. International student tuition is $31,000 and the total cost of attendance is $46,000. The average SAT score for undergraduate students is 1260 (28 ACT) but varies con- siderably by major. Potential students apply to and are accepted by colleges within the university and the admissions cutoff differs significantly by college. More than 40 percent of undergraduate students begin in engineering or science, but many switch to a major in an- other college after the first year. While not impossible, administrative hurdles make it very difficult for students to switch into engineering or science majors if they were not initially accepted into those colleges as a first-year student. Similar, but less insurmountable, hurdles exist for many other majors including those in the business school. Purdue’s ISA program is called “Back a Boiler.” The first year of the ISA program was the 2016-2017 academic year and the university offered the program to students in the final few months of the prior school year and over the summer. Interested students submit an application which includes permission to run a credit check. If the student has a bankruptcy or is currently in debt collection, they are disqualified. This is the only information the university requests as part of the credit check. To be eligible for the ISA, students must have remaining financial need after exhausting merit-based scholarships, grants, and opportunities for direct subsidized federal loans, direct unsubsidized federal loans, and ▇▇▇▇▇▇▇ loans. Purdue presents its ISA program as an alternative to a direct PLUS loan or a private student loan.4 Direct PLUS loans have higher interest rates than the other federal student loan options and while the money goes to the student’s education, it is the parent who is the borrower and responsible for payments. Private student loans have the highest interest rates of all student loan options. While ISAs are similar to income-based student loan repayment, the fundamental differ- ence is that ISAs have no loan balance that the borrower is paying down.5 In the language of ISAs, the “funding amount” is the amount of money the student receives, the “income 4Since the financial crisis, private student loans are less common, though there are still several large providers that are active in the market including Chase, CitiBank, ▇▇▇▇▇▇ ▇▇▇, and ▇▇▇▇▇ Fargo. 5In an effort to reduce the default rate, the US Department of Education has introduced several income- driven repayment plans where monthly payment are reduced to a certain percentage of discretionary income for an extended period of time or until the loan balance is repaid. See ▇▇▇▇▇▇▇ et al. (2018) for a comparison of student loan income-driven repayment plans and student income share agreements. share” is the fixed percentage of earned income the student agrees to pay for the term length after a grace period, and the “payment cap” is the maximum amount the student would be obligated to pay in case of very high earned income. Payments are deferred if the participant exits the labor force or reduces hours of work below full-time employment and therefore the term length is extended up to the “deferment cap” of a specified time period. If earned in- come drops below the “earned income threshold” while the participant is working full time, the participant makes no payments and the term length is not extended. The amount the student pays back may be more or less than the funding amount and there is no way to buy out the contract other than simply paying the payment cap. If ▇▇▇▇▇▇ Purdue finds the applicant to be eligible, he or she is sent a disclosure that describes the terms of the ISA program (see Figure 1). Prominently located at the top of the disclosure is the statement “this is not a loan.” The disclosure also provides payment illustrations which indicate the insurance aspect of the ISA. This framing of the ISA may have a large effect on participation (▇▇▇▇▇▇▇ et al., 2018). Eligible students also typically receive a disclosure for a direct PLUS loan and most students who do not participate in the ISA program choose a direct PLUS loan instead. In the Purdue ISA program, the income share is between 2.5 and 5.4 percent per $10,000 of funding for a term of between 80 to 116 months. The income share percentage depends only on the student’s major and year in school. Seniors receive the most favorable terms and sophomores receive the least favorable terms. This reflects both the longer grace period for sophomores and the increased probability of switching to a lower- paying major. The disclosure describes a “take it or leave it” funding offer. Students who choose to participate have their university account credited with the money at the beginning of the semester and receive a check for the portion above the remaining university tuition and fees. Student who do not accept the offered ISA ▇▇▇ either take a direct PLUS loan, a private loan, or self-finance their educational expenses in excess of their other federal student loans. In the first two years of the program, the only way a student could learn the applicable income share and length of the agreement was by submitting an application and receiving a disclosure. No information about the terms was posted to the ISA program website and students making inquiries were simply told to apply. This lead to a large number of students applying for an ISA and then choosing not to participate once they learned the terms. Before the third cohort considered applying, an income share agreement calculator was posted to the program website making it possible for interested students to see what terms they would be offered if they applied. This lead to a strong decrease in the number of applications from students who decided not to participate. My strategy for identifying adverse selection into the ISA program is based on the application being the only way to learn the ISA terms. My assumption is that all potentially interested students submitted an application. Participants make no payments while they are in school nor during the 6 month grace period immediately following graduation or choosing not to continue at the university. After graduation, participants provide the university with a pay stub to determine the monthly payment. The monthly payment is recalculated every year in June after Purdue’s servicing partner receives the W-2 and 1099-MISC from the IRS.6 The payment cap is 2.5 times the funding amount. If annual earnings are less than the $20,000 earned income threshold, the participant makes no payments. Purdue extends the term for each month that is deferred, unless the participant is unemployed and actively seeking employment or is working 35 hours per week or more and earning less than $20,000. This means that students who exit the labor force to go to graduate school or to care for family members delay the payment term up to the 60 month deferment cap. Participants are allowed to sign up for subsequent years of funding through the ISA up to an income share cap of 15 percent across all income share agreements.
Appears in 1 contract
Sources: Income Share Agreement