Bailey: Income Share Agreements Are an Innovative Way of Financing Tuition — and an Investment in the Workplace of Tomorrow
In response to the ever-changing nature of work, it is imperative that we adapt our training systems for the present and future jobs, as well as reconsider how we provide financial support. Income Share Agreements (ISAs) present an innovative financial solution for students in these new educational models.
The transformation in the job market is resulting in rapid job growth and increased income for individuals with higher levels of skills and education. The U.S. Department of Labor reports that over 6.5 million jobs remain vacant due to employers’ inability to find workers with the necessary expertise. With automation reshaping and eliminating certain jobs while creating new ones in different industries, this skills gap is likely to widen.
Addressing this skills gap requires not only strengthening the existing educational and workforce development pathways but also supporting emerging models that do not fit into traditional categories. One such example is a cluster of schools that combine the best aspects of coding boot camps and apprenticeships, funded through innovative ISAs.
The Holberton School, named after one of the first programmers of the ENIAC, Betty Holberton, is an exemplary case. It offers a comprehensive two-year program in San Francisco that equips individuals with the skills to become full stack software engineers. This position requires proficiency in areas such as databases, user interfaces, software design, security, and quality assurance. The program caters to a diverse range of students, with ages ranging from 18 to 58, and more than half of the students being individuals of color. Students learn through hands-on projects and benefit from guest lectures delivered by practicing coders, UX designers, and data scientists. The success of this model is evident from employer feedback, with LinkedIn CEO Jeff Weiner stating that Holberton produces exceptional graduates comparable to those from Ivy League institutions, but without the burden of high costs, lengthy programs, or strict prerequisites.
During my visit to Kenzie Academy in September, I witnessed an even more advanced approach. Co-founder and CEO Chok Ooi, formerly the CEO of AgilityIO, a technology consulting company, believed that technology apprenticeships could thrive not only in Silicon Valley and New York, but also in the heartland. To bring this vision to life, he established Kenzie Academy in Indianapolis, initially offering courses in coding and computer science. However, he enhanced the program by integrating paid apprenticeships, bridging the gap between education and employment.
Interestingly, neither Holberton nor Kenzie impose tuition fees until graduates secure employment. Instead, they rely on ISAs, which provide students with private funds to finance their education in exchange for a percentage of their future earnings for a predetermined period after graduation. While student loans operate on the concept of debt financing, ISAs resemble equity investing.
ISA repayments fluctuate based on graduates’ income during the repayment period, making them adaptable to changing economic conditions and life circumstances. Beth Akers, a scholar from the Manhattan Institute, emphasizes that ISAs offer an elegant solution by granting students access to their future earnings while simultaneously safeguarding against unfavorable financial outcomes. Payments are deferred when individuals temporarily exit the workforce due to reasons like raising children, pursuing further education, or losing a job.
ISAs possess several advantages over traditional student loans, primarily the fact that they incentivize quality without the need for burdensome regulation. Institutions offering ISAs assume the risk if a student fails to complete the program or secure a well-paying job. As repayment is based on graduates’ salaries, institutions are motivated to ensure their programs meet employer expectations, students successfully finish the program, and graduates obtain the highest-paying jobs available. This aligns the program with the needs of both students and employers, a feature lacking in most student financial aid programs.
Let’s take a closer look at how ISAs are applied at Kenzie. The first year of training incurs a cost of $24,000. Subsequently, students work at Kenzie Studio, the academy’s consulting division, where consulting contracts help alleviate tuition costs while providing practical learning opportunities. Tuition for the second year is fully covered by revenue generated from Kenzie Studio. Thus, the two-year program, valued at $48,000, is accessible to students for just $24,000. These expenses are covered through an ISA plan where students pay 17.5 percent of their earned income for a specific duration after graduation.
ISAs might also evolve into what Michael Horn, co-founder and distinguished fellow at the Clayton Christensen Institute for Disruptive Innovation, refers to as "renewable learning funds." These funds utilize investments in workforce development to create sustainable funds that can finance the education and training of future adult learners. It is conceivable that employers could utilize this structure for workforce training, while philanthropies could use it to offer assistance to low-income students in attending school.
The main obstacle preventing the widespread use of ISAs is regulatory uncertainty. Fortunately, Republican Senators Marco Rubio and Todd Young have introduced legislation that would establish a federal regulator and require certain consumer protections for ISAs to qualify for legal protection. This legislation would also mandate that ISA recipients are provided with the terms of a comparable loan.
ISAs offer a powerful policy solution for financing education and training. They not only support innovative models that go beyond traditional higher education financial aid, but also provide alternative financing options for current higher education students.
John Bailey is a current visiting fellow at the American Enterprise Institute, an adviser to the Walton Family Foundation, and a former domestic policy adviser to the White House.
Please note that the Walton Family Foundation provides financial support to .
