Income Share Agreements - Good For Students or Investors?
Money For the Rest of Us
J. David Stein
4.5 • 1.4K Ratings
🗓️ 29 July 2020
⏱️ 29 minutes
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Summary
What are the pros and cons of income share agreements for partially funding higher education. Are investing in ISA's a viable opportunity?
Topics covered include:
- How do income share agreements (ISAs) differ from student loans for funding higher education costs.
- Are ISA's really a partial form of slavery or indentured servitude
- What are the components of an ISA contract.
- How adverse selection, differential pricing, moral hazard, and a lack of regulation pose challenges to income share agreements.
- What is an internal rate of return and why is it the best metric for estimating the return of investing in ISAs.
- How students should evaluate ISA's relative to loans.
- What are some pricing examples for specific ISAs
- What options exist for investing in ISAs.
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Transcript
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| 0:00.0 | Welcome to Money for the rest of us. This is a personal finance show on Money. How it |
| 0:06.3 | works, how to invest it and how to live without worrying about it. |
| 0:09.7 | From your host David Stein today is episode 307. |
| 0:13.4 | It's titled, Income Share Agreements |
| 0:17.1 | Good for Students or Investors. |
| 0:21.8 | Over five years ago in episode 45 of money for the rest of us I introduced |
| 0:26.2 | income share agreements as a way to partially fund college. An income share |
| 0:32.0 | agreement is a contract where individuals agree to pay a certain percentage |
| 0:36.7 | of their income for a set period of time in exchange for an upfront payment that is usually |
| 0:41.6 | used to pay for education cost, but can be used for other things. |
| 0:46.6 | For example, a line income share funding says that you can get an ISA for home repairs, debt consolidation, paying a medical bill, or even planning your wedding. |
| 0:59.0 | Not sure I would do an income share agreement for most of those things. They are traditionally |
| 1:05.2 | used to invest in what is known as human capital, our ability to earn money by getting more education. Another name for income share agreements is |
| 1:17.0 | human capital contracts. Income share agreements were first proposed by the economist Milton Freeman in a 1955 essay titled |
| 1:27.2 | The Role of Government in Education. |
| 1:30.8 | He wrote, Vocational or Professional education is a form of investment in human capital. |
| 1:37.0 | Precisely analogous to investment in machinery, buildings or other forms of non-human capital. |
| 1:43.0 | Its function is to raise economic productivity of the human being. |
| 1:48.0 | If it does so, the individual is rewarded in a free enterprise society by receiving a higher return for his services than he would otherwise be able to command. |
| 1:58.0 | We discussed this concept sum in episode 245, is College worth it? |
| 2:04.6 | And determine there is a positive financial return in investing in human capital by attending |
| 2:10.9 | college. |
... |
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