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Analysis: College Grads Sell Stakes in Themselves to Wall Street - ABI

To fund part of the cost of a college degree, some students are sidestepping the common source of money, a student loan. Instead, they have agreed to hand over part of their future earnings through a new kind of financial instrument called an income-sharing agreement (ISA), according to a BloombergBusinessweek analysis. In a sense, financiers are transforming student debtors into stock investments, with much of the same risk and, ideally, return. For now, the market for income-sharing agreements can be measured in the tens of millions, a tiny sum compared with the $170 billion in outstanding asset-backed securities created from student loans. Only some schools let outside investment firms buy a stake in students. Others seek out individual donors, mostly wealthy alumni, or use money from their own endowments. Along with Purdue, which started its program in 2016, some smaller private schools such as Lackawanna College in Scranton, Pa., and Norwich University in Vermont are offering ISAs. The University of Utah recently announced a pilot plan. ISAs raise all kinds of questions. How many students will lose their jobs and be unable to pay? How much should Wall Street demand as compensation for the risk? Investors typically ask for a smaller slice from students with more lucrative majors. At Purdue, for example, English majors borrowing $10,000 pay 4.52 percent of their future income over nearly 10 years; chemical engineers, 2.57 percent in a bit over seven years.

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