Purdue invests in students’ futures with new model of financing

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Find all of our stories in our Rethinking College series

JUDY WOODRUFF: As students are heading back to
campus, we kick off a special series we do each year on
innovative ideas in higher education. It’s called “Rethinking
College.” We start with a look at how one university is fighting
the rising costs of tuition by investing in its students.


Hari Sreenivasan has our report. It’s part of our weekly segment,
Making the Grade.


HARI SREENIVASAN: College graduation, a time for
celebration. But for those with student loans, it’s also a time
of financial anxiety, because the repayment clock just started
ticking.


Last year alone, U.S. student debt reached $1.3 trillion. The
average amount owed was $37,000 dollars.


The sobering statistics led Purdue University in Indiana to offer
students a new way to pay for their degrees.


MITCH DANIELS, President, Purdue University: I
just know you are bound for exciting places, great achievements,
thrilling moments.


HARI SREENIVASAN: This year, Purdue began
funding students who agreed to pay back the university a
percentage of their future earnings.


READ MORE: Georgia students drop out with high debt
despite state surplus


MITCH DANIELS: We’re so very, very proud of you.


HARI SREENIVASAN: President Mitch Daniels says
the new funding model, called an income share agreement, can be
viewed as an investment, much like investing in the stock market.


MITCH DANIELS: Unlike student debt, it shifts
the burden — or the risk, I should say — entirely from the
student to the investor.


HARI SREENIVASAN: That’s because the terms of
the agreement, called an ISA, are made well before students
launch their careers. So, even if a student ends up in a
low-paying job, the pay-back percentage stays the same.


MITCH DANIELS: If the student’s career doesn’t
pan out too well during those early years, then the student is
not on the hook and the loss falls on the investor. The investor
is banking on the fact student is going to do well. And they’ll
get their money back and maybe a little more.


HARI SREENIVASAN: In this case, the investor is
Purdue’s Research Foundation, which funded all 160 students who
applied.


Throughout the year, Purdue sponsored workshops to explain income
share agreements.


WILLIAM NELLIGAN, Jain Family Institute: We
think education financing should be based on your potential.


HARI SREENIVASAN: Will Nelligan, who helped
create Purdue’s ISA model, explained how the agreements work.


WILLIAM NELLIGAN: Freedom from debt. You don’t
have a fixed amount that you need to repay, there’s no interest
attached to it.


HARI SREENIVASAN: Not having to pay interest
caught the attention of Purdue junior Alek Ventorino.


ALEK VENTORINO, Purdue University Student: The
worst fear is, even if I graduate and have a good job, because of
the interest, it’s not like you’re just paying off a certain
amount and it goes away. No, it’s going to take many years.


HARI SREENIVASAN: Proponents of income share
agreements say universities haven’t been held accountable for
graduates who fail to repay their loans.


MITCH DANIELS: I think it would be a good thing
if schools were more, had more, as they say, skin in the game.


HARI SREENIVASAN: In 2016, 11 percent of the
nation’s former students defaulted on federal loans.


MITCH DANIELS: I personally think that it’s been
a mistake that universities, and ours included, are not at risk
when a student doesn’t pay back their student loan. I very much
favor the accountability that would come from the school owning a
little bit of the — taking a little bit of the hit.


HARI SREENIVASAN: This year, senior Melissa
Gillbanks signed up for Purdue’s ISA. Until last year, she relied
on private loans to pay her out-of-state tuition.


(on camera): How deep in debt are you to —


MELISSA GILLBANKS, President, Purdue University:
A lot. I think currently, my Sallie Mae loans are sitting at like
80K without — that’s like without interest on top of that. You
get to learn a lot of different types of manufacturing —


HARI SREENIVASAN: In exchange for an additional
$30,000 from Purdue, Gillbanks agreed to share 5 percent of her
future earnings for 10 years.


(on camera): Would you have done an income share for the whole
thing if you could have?


MELISSA GILLBANKS: Absolutely.


HARI SREENIVASAN: So, it’s what you do your spare time.


MELISSA GILLBANKS: Yes.


HARI SREENIVASAN: Build a Thor hammer.


MELISSA GILLBANKS: Yes.


HARI SREENIVASAN: Gillbanks is a digital design
engineer, and feels pretty confident she’ll land a good salary.


MELISSA GILLBANKS: I try not to think about
it, because it’s a little daunting, because I know I’m going to
have a good job — well, OK, fingers crossed I’m going to have a
good job.


HARI SREENIVASAN: Each agreement is different.
The percentage of a student’s future income and the number of
years a student must pay back Purdue is based on how much money
that student is likely to earn.


So, who are you going after? Are you going after the ones who are
going to be engineers, doctors, lawyers, bankers?


MITCH DANIELS: Oh, yes. It’s a common
misunderstanding. But we had 70 different majors in the first
cohort of 160 ISAs, and STEM graduates, all the way down to
philosophy students and historians and so forth.


HARI SREENIVASAN: Critics argue that
universities should not be in the business of making bets on
financial outcomes based on fields of study. And, questions have
been raised about how this could impact a student’s choice of
majors.


ADAM WILLIAMS, Purdue University Student:
Wouldn’t this kind of program push incoming freshman or
sophomores to a more lucrative field? The earning potential of an
art major just isn’t that of a computer science major. So, do you
think this income agreement could push students to pursue
something that they’re not interested in, simply because they can
get funded for that major?


WILLIAM NELLIGAN: The way that we account is
again in adjusting those terms, right? A more professional major
might pay a smaller share of their income for a shorter period of
time, and someone, say, an art history, to use your example, pays
a slightly larger share for a longer period of time.


HARI SREENIVASAN: Senior Zach Meyer will pay a
smaller percentage than fellow student Gillbanks, the design
engineer. That’s because Meyer is majoring in financial
counseling and likely to have a lucrative career. For $10,000,
he’s agreed to pay 3.8 percent of his future income for 10 years.
But before Meyer’s signed, he had one question.


ZACH MEYER, Purdue University Student: If I’m
making a lot of money, am I going to have to pay back just a ton
of money?


HARI SREENIVASAN: The answer was no.


ZACH MEYER: They cap at two and a half times
whatever you borrow, so the most I’ll be paying back is $25,000.
So, I guess it’s not a big deal.


HARI SREENIVASAN: Purdue also sets a minimum
income threshold. If, in the future, you are out of work, or
earning very little, you don’t pay.


WILLIAM NELLIGAN: What feels most important to
you?


PURDUE UNIVERSITY STUDENT: The protection when
times get tough, so that way if you are unemployed, rather than
interest piling up, you’re already struggling to get back on your
feet, you don’t need interest on top of that.


HARI SREENIVASAN: Is it a good investment for
the university?


MITCH DANIELS: Well, we’ll find out. Frankly,
I’ll be disappointed if this new instrument doesn’t grow over
time, so that it attracts all kinds of investors, people who see
a chance, maybe to — yes, help a student, but also make some kind
of a return.


HARI SREENIVASAN: This fall, Purdue University
is expanding their income share agreement program from juniors
and seniors, to incoming sophomores.


In Indiana, for the PBS NewsHour, I’m Hari Sreenivasan.


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