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How to Escape the Student Debt Trap

Miguel Palacios, an assistant professor of finance at Vanderbilt University’s Owen School of Management, believes he knows the salvation for the massive student debt problem: Income-share agreements. Under such an agreement, a student “promises an investor a certain percent of his income over a fixed period in exchange for cash.” It’s not a loan, and there’s no outstanding balance. The Wall Street Journal reports:

Students who earn more pay more, and students who earn less pay less.

Mr. Palacios says income-share agreements, or ISAs, can mitigate the damage from what he calls the coming student-loan “train wreck.” First, they “send a strong signal about value,” he says. Want to get a peace-studies degree for $100,000? Be prepared to pay a hefty portion of your income for a really long time. ISAs give students much-needed information about which programs are more likely to lead to employment. Over time, colleges would be forced to lower costs and offer better value. Most important, ISAs take away “the risk of financial ruin,” Mr. Palacios says. If you don’t earn any money, you don’t pay any money.

Of all people, it was rocker David Bowie who first inspired Palacios. In 1997 Bowie financed his upcoming album using an income-share type of plan.

Read the full article here.

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