Purdue program bases repayment on postgraduate income.

Across the USA, tens of thousands of college students are graduating this month with freshly minted diplomas — and piles of debt. In 2014, the average student borrower had nearly $30,000 in loans.

Put simply, the system of paying for college is a mess. Soaring tuition has made student loans the nation’s second largest category of debt behind mortgages, with 43 million people owing $1.3 trillion. More than one in six are at least nine months behind on payments.

With students balking and default rates on the rise, candidates for national office are proposing a variety of solutions. These range from increasing the already large federal subsidies for higher education to relying more on online classes. But the best ideas might be those percolating up from states and individual universities.

At Purdue University in Indiana, for instance, the school has decided to remove some of the risk students take on by having the college make a calculated investment in their future. The “Back a Boiler” program calls for Purdue students (known as Boilermakers) to pay a percentage of their postgraduation income rather than repaying the fixed amount of a loan. It is open to juniors and seniors beginning this fall, with plans for expanding it within a few years.

Students who choose this program sign something known as an Income Share Agreement. Purdue’s would last nine years, starting six months after graduation. The percentage paid would depend on the amount of money the college puts up, the student’s major and the time before graduation.

For example, an economics major entering her junior year, who needs $13,000 in financing, would agree to pay 4.81% of her income beginning in late 2018. On average, a student like her would start with an annual salary of $45,000, with the amount rising 3.72% per year, meaning she would pay $21,320 over nine years.

That figure is almost exactly what she’d pay with a government-backed PLUS Loan with an interest rate of 6.84%.  But she’d have the comfort of knowing that she’d get a break if she graduated into a weak job market and spent two years finding full-time work.

One of the beauties of the program is that it takes risk off the backs of young people at a vulnerable point in their lives. Another is that it could greatly reduce the number of students behind on their payments and help students understand the value of their degrees.

The federal government has a similar income-based repayment program, but the Purdue approach has the logic of the market behind it. While the university is currently financing the program itself, it is counting on attracting outside investors. And Purdue President Mitch Daniels sees the program being replicated at other universities as well.

Because investors would count on an engineering major making more money than an art major, they’d accept a lower percentage in the Income Share Agreement. Percentages would likely rise or fall over time depending on earning track records of each major.

Will this work? Will students and investors go for it? The only way to find out is to give it a try.

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