The Donahoe Higher Education Act provides for a public postsecondary education system in this state. This system consists of the University of California, the California State University, and the California Community Colleges. The act applies to the University of California only to the extent that the Regents of the University of California act by resolution to make it applicable.

This bill would request the University of California and require the California State University and, as a condition of receipt of funds appropriated for purposes of the bills provisions, the University of California to each select a university campus of their respective system to establish, commencing with the 202021 academic year, a pilot program to waive the tuition for participating students who to enter into an income share agreement with the university. campus. These agreements would specify that moneys for the pilot program would be provided to students for costs of attendance, with students agreeing to pay a portion of their future incomes in exchange. The bill would provide that the period of repayment shall not exceed 10 years and shall commence 6 months after the students graduation. The bill would require the income share agreement to be subject to specified requirements, including, among others, that the agreement provide for monthly payments to be based on a specified percentage of the students annual income for 10 years after graduation. income. The bill would require the pilot program to be open to students in their sophomore, junior, or senior year, and would authorize the university campus to impose other eligibility requirements and cap the number of participants based on the amount of moneys appropriated for the pilot program. The bill would require that implementation of the pilot program be contingent upon the appropriation of funds for purposes of the pilot program this purpose in the annual Budget Act or other statute. The bill would require each participating campus to submit a report no later than November 1, 2022, and a 2nd report no later than November 1, 2025, to the appropriate policy and fiscal committees of the Legislature containing specified information about the pilot program.

The Donahoe Higher Education Act provides for a public postsecondary education system in this state. This system consists of the University of California, the California State University, and the California Community Colleges. The act applies to the University of California only to the extent that the Regents of the University of California act by resolution to make it applicable.

This bill would require the University of California, Los Angeles, and the California State University, Sacramento, request the University of California and the California State University to each select a university of their respective system to establish, commencing with the 202021 academic year, a pilot program to waive the tuition for participating students who enter into an income share agreement with the university. The bill would require the income share agreement to be subject to specified requirements, including, among others, that the agreement provide for monthly payments to be based on a specified percentage of the students annual income for ten 10 years after graduation. The bill would require the pilot program to be open to students in their sophomore, junior, or senior year, and would authorize the university to impose other eligibility requirements and cap the number of participants based on the amount of moneys appropriated for the pilot program. The bill would require that implementation of the pilot program be contingent upon the appropriation of funds for purposes of the pilot program in the annual Budget Act or other statute.

The Donahoe Higher Education Act provides for a public postsecondary education system in this state. This system consists of the University of California, the California State University, and the California Community Colleges. The act applies to the University of California only to the extent that the Regents of the University of California act by resolution to make it applicable.

This bill would require the University of California, Los Angeles, and the California State University, Sacramento, to establish, commencing with the 202021 academic year, a pilot program to waive the tuition for participating students who enter into an income share agreement with the university. The bill would require the income share agreement to be subject to specified requirements, including, among others, that the agreement provide for monthly payments to be based on a specified percentage of the students annual income for ten years after graduation. The bill would require the pilot program to be open to students in their sophomore, junior, or senior year, and would authorize the university to impose other eligibility requirements and cap the number of participants based on the amount of moneys appropriated for the pilot program. The bill would require that implementation of the pilot program be contingent upon the appropriation of funds for purposes of the pilot program in the annual Budget Act or other statute.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2017 - 2018 Regular Session

AB 2479 (Voepel) - Public postsecondary education: income share agreement: pilot program

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

This bill requires the establishment of an income share agreement (ISA) pilot program at one campus each of the University of California (UC) and the California State University (CSU), contingent on funding for this purpose

Fiscal Impact:

• While the bill’s provisions would be contingent upon an appropriation, it would result in General Fund cost pressure likely in the low millions of dollars each year to establish the ISA pilot programs.

• Because the bill authorizes the use of up to 5 percent of moneys annually deposited into a campus’s revolving fund for the cost of administering the program, it could become self-supporting over time if the campuses collect sufficient income from program participants.
• The UC and CSU each anticipate General Fund costs in the low hundreds of thousands of dollars to develop and administer the ISA pilot programs over a five-year period. These costs would cover program management, legal activities to draft enforceable agreements, and the development of the two reports that would be required. These costs could also be covered by program revenues over time to the extent there is sufficient participation and income.

Background:

Existing law establishes the Middle Class Scholarship Program which provides grant aid to undergraduate students enrolled in the UC, CSU or a community college who is enrolled in a B.A. pilot program with family incomes of up to $150,000 and household assets of up to $156,000. The scholarship amount is limited to no more than 40 percent of the UC, CSU or community college mandatory system-wide tuition and fees. The individual award amount is determined after any other publicly-funded financial aid is received. In addition, grant recipients must be a California resident, or have AB 540 status; not be incarcerated; not be in default on a student loan; maintain a 2.0 GPA.

Proposed Law:

This bill requires the CSU and UC, as a condition of receipt of funds appropriated for purposes of the bill, to select a campus (in each system) to establish a pilot program to provide moneys from the campus’s Income Share Agreement Revolving Fund to participating students who enter into an income share agreement.

This bill defines “income share agreement” to mean an agreement between a participating campus and a student under which the student commits to pay a specified percentage of his or her future income, for a specified period of time, in exchange for payments to, or on behalf of, the student for a portion of his or her cost of attendance at the campus.

This bill requires the income share agreements to be subject to all of the following requirements:

1. Base monthly payments on a specified percentage of the student’s annual income for a specified period of repayment not to exceed 10 years. Specifies the period of repayment commence six months after the student’s graduation.
2. Provide that no monthly payment is owed by the student for the period of time the student’s annual income is below $20,000.
3. Provide that the period of repayment determined may be extended by the number of years equal to the number of years the agreement is in force for which the student’s annual income is below $20,000.
4. Specify the definition of “income” to be used for purposes of calculating the student’s repayment obligation under the agreement.
5. Specify the terms and conditions under which the student may extinguish his or her repayment obligation under the agreement before the end of the repayment period.
6. Specify a cap on the total amount that a student would have to pay pursuant to the agreement.

This bill provides that an income share agreement is not in compliance with the bill unless the student, prior to entering into the agreement, is provided a disclosure document with information, as specified.

This bill authorizes a campus to impose additional terms or requirements in the income share agreements that are consistent with the bill’s provisions, and prohibits the campus from exerting authority over a student’s selection of a baccalaureate degree program based solely on the student’s participation in the pilot program.

This bill provides that the pilot program be open to students in their sophomore, junior, or senior year and specifies that individuals may enter into agreements for one or more of those years.

This bill authorizes other eligibility requirements and caps the number of participants based on the amount of moneys appropriated for the pilot program.

This bill requires moneys appropriated to implement the pilot program be deposited into the UC Income Share Agreement Revolving Fund and the CSU Income Share Agreement Fund, as specified. This bill authorizes the campus to use up to 5 percent of moneys annually deposited into its fund for the cost of administering the pilot program.

This bill requires each participating campus submit a report to the appropriate policy and fiscal committees of the Legislature not later than November 1, 2022, and again November 1, 2025, that includes information regarding program participation.

This bill makes implementation of the pilot program contingent upon the appropriation of funds for this purpose in the annual Budget Act or other statute.

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SENATE COMMITTEE ON EDUCATION

Senator Benjamin Allen, Chair

2017 - 2018 Regular

Bill No: AB 2479 Hearing Date: June 27, 2018

Subject: Public postsecondary education: income share agreement: pilot program

SUMMARY

This bill requires the establishment of an income share agreement (ISA) pilot program at one campus each of the University of California (UC) and the California State University (CSU), contingent on funding for this purpose.

BACKGROUND

Existing law establishes the Middle Class Scholarship Program to offset a portion of tuition costs at the UC and CSU for students with annual household incomes less than $150,000. (Education Code § 70020, et seq.)

ANALYSIS

This bill:

1. Requires, commencing with the 2020-21, the CSU and as a condition of receipt of moneys appropriated for purpose of the bill, the UC, select a campus of their respective system to establish a pilot program to provide moneys from the campus’s Income Share Agreement Revolving Fund, to participating students who enter into an income share agreement with the campus.
2. States that it is the intent of the Legislature that the pilot program target students who would benefit from an income share agreement as a feasible alternative to using student loans to pay for a portion of their costs of attendance at the campus.
3. Defines for purposes of the bill, “income share agreement” to mean an agreement between a participating campus and a student under which the student commits to pay a specified percentage of his or her future income, for a specified period of time, in exchange for payments to, or on behalf of, the student for a portion of his or her cost of attendance at the campus.
4. Requires each of the income share agreements be subject to all of the following requirements:
   1. Base monthly payments on a specified percentage of the student’s annual

income for a specified period of repayment not to exceed 10 years. Specifies the period of repayment commence six months after the student’s graduation.

• 1. Provide that no monthly payment is owed by the student for the period of

time the student’s annual income is below $20,000.

• 1. Provide that the period of repayment determined may be extended by the

number of years equal to the number of years the agreement is in force for which the student’s annual income is below $20,000.

• 1. Specify the definition of “income” to be used for purposes of calculating

the student’s repayment obligation under the agreement.

• 1. Specify the terms and conditions under which the student may extinguish

his or her repayment obligation under the agreement before the end of the repayment period.

• 1. Specify a cap on the total amount that a student would have to pay

pursuant to the agreement.

1. Provides that an income share agreement is not in compliance with the bill unless the student, prior to entering into the agreement, is provided a disclosure document that clearly states all of the following:
   1. That the agreement is not a debt instrument.
   2. That the amount the student will be required to pay under the agreement

may be more or less than the amount provided to the student, but not exceed the cap specified in the agreement and may vary in proportion to the student’s future annual income.

• 1. That the repayment obligation of the student under the agreement may not

be dischargeable under the bankruptcy law.

• 1. Under what terms the student’s repayment obligation under the agreement

may be extinguished by accelerating payments.

• 1. The duration of the student’s obligation under the agreement, including

any circumstances under which the contract may be extended.

• 1. The percentage of the student’s future income he or she is committing to

pay under the agreement and the minimum amount of the annual income that triggers the student’s repayment obligation under the agreement.

• 1. The definition of “income” to be used for purposes of calculating the

student’s repayment obligation.

1. Authorizes a campus to impose additional terms or requirements in the income share agreements that are consistent with the bill’s provisions.
2. Prohibits the campus from exerting authority over a student’s selection of a baccalaureate degree program based solely on the student’s participation in the pilot program. State’s that it is the Legislature’s intent that students approved to participate in the pilot program be enrolled in a wide variety of baccalaureate degree programs.
3. Provides that the pilot program be open to students in their sophomore, junior, or senior year and specifies that individuals may enter into agreements for one or more of those years.
4. Authorizes the university to impose other eligibility requirements and cap the number of participants based on the amount of moneys appropriated for the pilot program.
5. Requires moneys appropriated to implement the pilot program be deposited into the University of California (UC) Income Share Agreement Revolving Fund and the California State University (CSU) Income Share Agreement Fund. Requires moneys in each fund be transferred to the applicable campus without regard to fiscal years to provide moneys to each student who enters into an income share agreement with the campus. Requires payments made by the student to the income share agreement be deposited into the applicable fund and be used by the campus to enter into additional income share agreements. Authorizes the campus to use up to 5 percent of moneys annually deposited into its fund for the cost of administering the pilot program.
6. Requires each participating campus submit a report to the appropriate policy and fiscal committees of the Legislature not later than November 1, 2022, and again November 1, 2025, that includes information regarding program participation.
7. Makes implementation of the pilot program contingent upon the appropriation of funds for this purpose in the annual Budget Act or other statute.

STAFF COMMENTS

1. Need for the bill. According to the author, “existing law has taxpayers subsidize postsecondary education at UCs and CSUs through the state’s General Fund and the students cover the remaining cost of tuition and fees out-of-pocket, with loans, or grants. California college students with an annual family income of $76,500 or less qualify for financial aid in the form of federal and state grants. Students who do not qualify for financial assistance must seek other financing options, such as federal or personal loans.”

The author asserts that an “income share agreement offers opportunities for California investors, relives the burden of student loan debt, and eases the cost of education on taxpayers.”

1. Student loan debt. According to The Institute for College Access and Success (TICAS) and its Project on Student Debt, 68 percent of seniors who graduated from public and nonprofit colleges in 2016 had student loan debt, with an average nationally of $30,100 per borrower. TICAS reports that the share of graduates with debt rose modestly over the last decade (from 65 percent to 69 percent). TICAS also reports that average debt in California is $22,744 at public and private non-profit colleges and that about 53 percent of students graduate with debt, ranking California 48^th and 37^th lowest nationally, respectively. The highest ranking state is New Hampshire with an average debt of $36,367 and 74 percent of students graduating with debt. Over California falls well below the national average for student loan debt.
2. Existing aid program for middle-class families. The state’s Middle-Class Scholarship program provides grant aid to undergraduate students enrolled in the University of California (UC), the California State University (CSU) or a community college who is enrolled in a B.A. pilot program with family incomes of up to $150,000 and household assets of up to $156,000. The scholarship amount is limited to no more than 40 percent of the UC or CSU, California Community Colleges (CCC) mandatory system-wide tuition and fees. The individual award amount is determined after any other publicly-funded financial aid is received. In addition, grant recipients must be a California resident, or have AB 540 status; not be incarcerated; not be in default on a student loan; maintain a 2.0 GPA. According to the California Student Aid Commission, over 49,000 MCS grants were paid during the 2015-16 academic year which resulted in a 94.2 percent paid rate.
3. Income Share Agreements (ISA). An ISA is a contract in which a person agrees to pay a fixed percentage of their income for a defined length of time in exchange for up-front funding or services. In higher education, this contract is typically between a student and an institution. An ISA differs from a loan in how the amount owed is calculated. In a loan, the individual makes payments based on an interest rate until their principal balance is reduced to zero. With an ISA, the individual pays a percentage of their income for a set period of time, regardless of the total amount paid. While investors have provided ISAs to individuals, only a few colleges have implemented an ISA program. Institutional ISA programs are not intended to replace grants, scholarships, or government-subsidized student loans, but may provide a financing option for students who might otherwise take out private loans or federal Parent Plus loans, each of which carry higher interest rates than government-subsidized loans.
4. Things to consider. Though income share agreements can provide students with an additional option to cover the cost of college and some universities have implemented programs like the one proposed, the funding provided through an income share agreement is borrowed money that needs to be repaid. According to the American Institutes for Research, 2017 brief on Income Share Agreements: An Alternative to Traditional College Financing, “ISAs share many of the advantages of income-driven loan repayment, but ISAs are based on a time period rather than a debt amount. Recipients could end up paying more or less than they originally receive over the course of the agreement.” Additionally, ISAs do not treat all borrowers the same and risk assessment could take into account credit history and field of study. In a recent 2017 publication by New America, “Income Share Agreements (ISA) Aren’t a Solution to Student Debt,” cautions if not appropriately regulated ISAs could be susceptible to irresponsible and unfair borrowing to vulnerable student populations. It appears that ISAs if implemented responsibly could be a useful option for some students but this activity/industry is somewhat new and could use greater oversight to protect consumers from bad actors or unintentionally overly committing their repayment obligation. In general, the Legislature may wish to proceed with caution when considering development of these types of programs.

The provisions in this bill establish two pilot programs to be administered by a California State University and University of California campus respectively. It also provides some consumer protection provisions that include disclosure of student’s repayment obligation prior to entering into the agreement. The participating campuses would report twice to the Legislature on the results of the pilot program. This bill’s provisions are contingent upon an appropriation from the annual Budget Act. Staff is unaware of funding provided for that purpose.

1. Related legislation. AB 1972 (Choi), in the Assembly Banking and Finance Committee, authorizes the use of ISAs, as specified, between two parties – as ISA funder and a receiver, for the purpose of funding costs associated with the receiver's postsecondary education.

SUPPORT

None received

OPPOSITION

None received

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 2479

Author:(Voepel)

As Amended Ver:April 16, 2018

Majority vote

SUMMARY: Requires establishment of an income share agreement (ISA) pilot program at one campus each of the University of California (UC) and the California State University (CSU), contingent on funding for this purpose.

EXISTING LAW: Establishes the Middle Class Scholarship Program to offset a portion of tuition costs at the UC and CSU for student with annual household incomes less than $150,000 (Education Code Section 70020, et seq.).

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1. Annual General Fund (GF) costs, likely in the low millions of dollars, to support ISA pilot program.
2. One-time GF cost pressures in the high tens of thousands of dollars to develop the ISA program at UC.
3. Annual GF cost pressures in the low hundreds of thousands of dollars for UC to hire a full-time staff person, develop information for reports, and manage the program and to require legal counsel to draft legally enforceable agreements.
4. One-time GF cost pressures in the high tens of thousands of dollars to develop the ISA program at UC.
5. Annual GF cost pressures in the low hundreds of thousands of dollars for CSU to hire a full-time staff person, develop information for reports, and manage the program and to require legal counsel to draft legally enforceable agreements.

COMMENTS: Background. An ISA is a contract in which a person agrees to pay a fixed percentage of their income for a defined length of time, in exchange for up-front funding or services. (The general concept of an ISA was first developed by economist Milton Freedman in the 1950s.) In higher education, this contract is typically between a student and an institution. An ISA differs from a loan in how the amount owed is calculated. In a loan, the individual makes payments based on an interest rate until their principal balance is reduced to zero. With an ISA, the individual pays a percentage of their income for a set period of time, regardless of the total amount paid. There is no outstanding "balance."

ISAs thus offer an alternative to debt. Debt creates substantial risks to students if they cannot afford their payments after college, whereas ISA payments adjust according to levels of income. In addition, ISAs typically have a minimum income threshold and a maximum payment cap, so students will not pay if they do not meet a minimum income level, while those earning a substantial income will not pay more than a certain maximum amount.

An ISA differs from a traditional loan in that students aren't accruing interest on the total amount funded through the ISA. Most individuals entering into an ISA, however, will pay more than the principal amount borrowed. The amount required to pay (the Income Share percentage multiplied by earned income) only grows due to the growth in earned income. The income share percentage level does not change over the course of the ISA repayment.

While ISAs have been provided by investors to individuals, only a few colleges have implemented an ISA program. The largest and most well-known program is Purdue University's "Back a Boiler," which to date has been funded by the university's foundation. (Purdue's mascot is the Boilermaker.) The program, which began in 2016, has provided $5.9 million in ISAs to almost 500 Purdue students. In its first year, the program was limited to junior and seniors, and provided ISAs to students in 79 different majors. The program was subsequently expanded to include sophomores.

Purdue's program is intended not to replace grants, scholarships, or government-subsidized student loans, but rather is an option for students who might otherwise take out private loans or federal Parent Plus loans, each of which carry higher interest rates than subsidized loans. The Back a Boiler website includes a comparison tool allowing a student to compare the potential monthly and total costs of an ISA with a PLUS loan and private loan of the same principal amount. (https://purdue.edu/backaboiler/comparison/index.html) This tool also models an ISA, based on the amount of the ISA and the student's major and expected graduation date. This translates to assumptions about the student's expected income upon graduation and subsequent income growth, and results in an income share percentage that the student would have to pay and a time period of repayment.

For example, according to the model, a civil engineer graduating in June 2019 is projected to have an income of $54,000 upon graduation and that income is assumed to grow by 3.8% annually on average. If this student accepted an ISA of $10,000, they would pay 3.03% of their income for the first 96 months following graduation. (All ISAs have a six month grace period before payments begin and the repayment period is typically between 9 and 10 years.) Conversely, a history major graduating at the same time is projected to have an income of $37,000 upon graduation. For a $10,000 ISA, this student would pay 3.92% of their income for 112 months following graduation.

Other elements of the Purdue program include a minimum income under which a graduate does not have to make ISA payments and an absolute cap of 2.5 times the ISA amount that a graduate would ever have to pay

Purpose. The author notes the increasing debt that students are assuming upon graduation. Nationwide, student loan debt totaled over $1.2 trillion in 2015, an increase of over 250% since 2004. California students who took out loans and graduated in 2015 had an average loan debt of over $22,000. The author proposes to giving students another option for financing their higher education by funding an ISA pilot program at one UC and CSU campus, respectively.

This bill encompasses many of the parameters of the "Back a Boiler" program. It establishes a minimum income threshold for requiring ISA repayment and requires a limit on the repayment period, a six-month grace period, and an absolute cap on the amount that would be repaid. The bill also contains consumer protection provisions, by requiring that specified terms and conditions of an ISA be fully disclosed to a student prior to their entering into an ISA.

The bill also establishes a revolving fund at the participating campuses. Appropriated funds would be deposited into the revolving fund for the initial ISAs, and graduates' subsequent ISA payments would be deposited into the fund to provide ISAs for additional students. The participating campuses would report twice to the Legislature on the results of the pilot program.

Related legislation. AB 1972 (Choi) of the current legislative session, which was not heard in the Assembly Banking and Finance Committee, authorized the use of ISAs, as specified, between two parties – as ISA funder and a receiver, for the purpose of funding costs associated with the receiver's postsecondary education.

Analysis Prepared by: Jeanice Warden / HIGHER ED. / (916) 319-3960 FN: 0003181

Date of Hearing: May 9, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 2479

Author:(Voepel) – As Amended Ver:April 16, 2018

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY: This bill creates an income share agreement (ISA) pilot program at one campus each of the University of California (UC) and the California State University (CSU), contingent on funding for this purpose. It also requires the pilots to report twice on program results, once by November 1, 2022, and again by November 1, 2025. The bill specifies pilot campuses may use up to 5% of ISA funding annually to administer the program.

FISCAL EFFECT:

1. Annual GF costs, likely in the low millions of dollars, to support ISA pilot program. ($1 million dollars annually would support living expenses of $10,000 for 100 students.) Over time, the program could become self-supporting if universities collected sufficient participant income.
2. One-time GF cost pressures in the high tens of thousands of dollars to develop the ISA program at UC. (The bill allows campuses to use a portion of ISA funding to pay administrative costs. ISA funding would initially be GF, until students began paying the funds back after graduation.)
3. Annual GF cost pressures in the low hundreds of thousands of dollars for UC to hire a full-time staff person, develop information for reports, and manage the program and to require legal counsel to draft legally enforceable agreements. (The bill allows campuses to use a portion of ISA funding to pay administrative costs. ISA funding would initially be GF, until students began paying the funds back after graduation.)
4. One-time GF cost pressures in the high tens of thousands of dollars to develop the ISA program at UC. (The bill allows campuses to use a portion of ISA funding to pay administrative costs. ISA funding would initially be GF, until students began paying the funds back after graduation.)
5. Annual GF cost pressures in the low hundreds of thousands of dollars for CSU to hire a full-time staff person, develop information for reports, and manage the program and to require legal counsel to draft legally enforceable agreements. (The bill allows campuses to use a portion of ISA funding to pay administrative costs. ISA funding would initially be GF, until students began paying the funds back after graduation.)

COMMENTS:

1. Income Share Agreements. An ISA is a contract in which a person agrees to pay a fixed percentage of their income for a defined length of time in exchange for up-front funding or services. In higher education, this contract is typically between a student and an institution. An ISA differs from a loan in how the amount owed is calculated. In a loan, the individual makes payments based on an interest rate until their principal balance is reduced to zero. With an ISA, the individual pays a percentage of their income for a set period of time, regardless of the total amount paid. There is no outstanding “balance.” While investors have provided ISAs to individuals, only a few colleges have implemented an ISA program. Institutional ISA programs are not intended to replace grants, scholarships, or government-subsidized student loans, but may provide an financing option for students who might otherwise take out private loans or federal Parent Plus loans, each of which carry higher interest rates than government-subsidized loans.
2. Program Details. This bill establishes parameters similar to other institutional ISA programs. It establishes a minimum income threshold for requiring ISA repayment and requires a limit on the repayment period, a six-month grace period, and an absolute cap on the amount that would be repaid. The bill also contains consumer protection provisions, by requiring that specified terms and conditions of an ISA be fully disclosed to a student prior to their entering into an ISA. In addition, the bill establishes a revolving fund at the participating campuses. Appropriated funds would be deposited into the revolving fund for the initial ISAs, and graduates' subsequent ISA payments would be deposited into the fund to provide ISAs for additional students.
3. Staff Comments. This bill does not include an appropriation for its purpose and presumably would require funding in the budget act or another statute for implementation.

Analysis Prepared by: Natasha Collins / APPR. / (916) 319-2081

Date of Hearing: April 24, 2018

ASSEMBLY COMMITTEE ON HIGHER EDUCATION

Jose Medina, Chair

ABPCA Bill Id:AB 2479 (

Author:Voepel) – As Amended Ver:April 16, 2018

SUBJECT: Public postsecondary education: income share agreement: pilot program

SUMMARY: Requires establishment of an income share agreement (ISA) pilot program at one campus each of the University of California (UC) and the California State University (CSU), contingent on funding for this purpose. Specifically, this bill:

1. Requires UC and CSU to select one of their respective campuses to establish a pilot program in 2020-21 to provide funds for students who enter into ISAs with the campus.
2. States legislative intent that the pilot program be targeted to students for whom ISAs could provide a feasible alternative to using loans to pay for a portion of their costs of college attendance.
3. Defines "income share agreement" as one between the campus and a student under which the student commits to pay a specified percentage of the student's future income, for a specified period of time, in exchange for payments to or on behalf of the student for a portion of the costs of his or her postsecondary education.
4. Stipulates that an ISA shall include all of the following:
   1. Require monthly payments, of a specified percentage of the student's annual income for a specified period of repayment not to exceed 10 years, and specifies that the period of repayment begins six months after the student's graduation;
   2. Not require any monthly payment for the period of time the student's annual income is below $20,000;
   3. Provide that the payment specified in (a) may be extended by the number of years equal to the number of years during which the agreement is in force for which the student's annual income is below the amount specified in (b);
   4. Specify the definition of income to be used for purposes of calculating a student's obligation under the contract;
   5. Specify the terms and conditions by which the student may extinguish their obligation under the ISA before the end of the repayment period; and,
   6. Specify a cap on the amount that a student will ever have to pay under the agreement.
5. Provides that an ISA is not in compliance with this statute unless the student, prior to entering into the ISA, is provided a disclosure document clearly stating all of the following:
   1. That the ISA is not a debt instrument, and that the amount the student will be required to pay under the agreement may be more or less than the amount provided to the student and will vary in proportion to the student's future income;
   2. That the obligations of the student under the ISA may not be dischargeable in bankruptcy law;
   3. Under what terms the student's obligations under the agreement may be extinguished by accelerating payments;
   4. The duration of the student's obligation under the agreement, included any circumstances under which the contract would be extended;
   5. The percentage of the student's future income that the student is committing to pay under the ISA and the minimum amount of annual income that triggers the student's obligation under the agreement to make payments; and,
   6. The definition of income to be used for purposes of calculating the student's obligation.
6. Authorizes UC or CSU to impose additional terms or requirements for the program that are not inconsistent with the above.
7. Stipulates that the campus may not exert any authority over a student's selection of a baccalaureate degree program based solely on the student's participation in the pilot program.
8. States legislative intent that students approved to participate in the pilot program be enrolled in a wide variety of baccalaureate degree programs.
9. Stipulates that students in their sophomore, junior, or senior year are eligible to participate in the pilot program.
10. Authorizes UC or CSU to impose other eligibility requirements and cap the number of participants based on the moneys appropriated for the program.
11. Makes implementation of the ISA pilot contingent on an appropriation of funds for this purpose.
12. Provides that monies appropriated for the program shall be placed in an Income Share Agreement Revolving Fund, to be administered by the participating UC and CSU campus, respectively, and shall be used to provide funds to students who enter into ISAs. Payments made by graduates pursuant to an ISA shall be deposited into the revolving fund to be used by the campus to enter into additional ISAs. Allows campuses to use up to five percent of moneys annually deposited into the revolving fund for administration of the pilot program.
13. Requires the participating campuses to report specified information about the program to the Legislature by November 1, 2022 and again by November 1, 2025.

EXISTING LAW: Establishes the Middle Class Scholarship Program to offset a portion of tuition costs at the UC and CSU for student with annual household incomes less than $150,000. (Education Code Section 70020, et seq.)

FISCAL EFFECT: Unknown, though a viable pilot program would at least have one-time costs of several million dollars.

COMMENTS: Background. An Income Share Agreement is a contract in which a person agrees to pay a fixed percentage of their income for a defined length of time, in exchange for up-front funding or services. (The general concept of an ISA was first developed by economist Milton Freedman in the 1950s.) In higher education, this contract is typically between a student and an institution. An ISA differs from a loan in how the amount owed is calculated. In a loan, the individual makes payments based on an interest rate until their principal balance is reduced to zero. With an ISA, the individual pays a percentage of their income for a set period of time, regardless of the total amount paid. There is no outstanding “balance.”

ISAs thus offer an alternative to debt. Debt creates substantial risks to students if they cannot afford their payments after college, whereas ISA payments adjust according to levels of income. In addition, ISAs typically have a minimum income threshold and a maximum payment cap, so students will not pay if they do not meet a minimum income level, while those earning a substantial income will not pay more than a certain maximum amount.

An ISA differs from a traditional loan in that students aren't accruing interest on the total amount funded through the ISA. Most individuals entering into an ISA, however, will pay more than the principal amount borrowed. The amount required to pay (the Income Share percentage multiplied by earned income) only grows due to the growth in earned income. The income share percentage level does not change over the course of the ISA repayment.

While ISAs have been provided by investors to individuals, only a few colleges have implemented an ISA program. The largest and most well-known program is Purdue University's "Back a Boiler," which to date has been funded by the university's foundation. (Purdue's mascot is the Boilermaker.) The program, which began in 2016, has provided $5.9 million in ISAs to almost 500 Purdue students. In its first year, the program was limited to junior and seniors, and provided ISAs to students in 79 different majors. The program was subsequently expanded to include sophomores.

Purdue's program is intended not to replace grants, scholarships, or government-subsidized student loans, but rather is an option for students who might otherwise take out private loans or federal Parent Plus loans, each of which carry higher interest rates than subsidized loans. The Back a Boiler website includes a comparison tool allowing a student to compare the potential monthly and total costs of an ISA with a PLUS loan and private loan of the same principal amount. (https://purdue.edu/backaboiler/comparison/index.html) This tool also models an ISA, based on the amount of the ISA and the student's major and expected graduation date. This translates to assumptions about the student's expected income upon graduation and subsequent income growth, and results in an income share percentage that the student would have to pay and a time period of repayment.

For example, according to the model, a civil engineer graduating in June 2019 is projected to have an income of $54,000 upon graduation and that income is assumed to grow by 3.8% annually on average. If this student accepted an ISA of $10,000, they would pay 3.03% of their income for the first 96 months following graduation. (All ISAs have a six month grace period before payments begin and the repayment period is typically between 9 and 10 years.) Conversely, a history major graduating at the same time is projected to have an income of $37,000 upon graduation. For a $10,000 ISA, this student would pay 3.92% of their income for 112 months following graduation.

Other elements of the Purdue program include a minimum income under which a graduate does not have to make ISA payments and an absolute cap of 2.5 times the ISA amount that a graduate would ever have to pay

Purpose. The author notes the increasing debt that students are assuming upon graduation. Nationwide, student loan debt totaled over $1.2 trillion in 2015, an increase of over 250% since 2004. California students who took out loans and graduated in 2015 had an average loan debt of over $22,000. The author proposes to giving students another option for financing their higher education by funding an ISA pilot program at one UC and CSU campus, respectively.

AB 2479 encompasses many of the parameters of the "Back a Boiler" program. It establishes a minimum income threshold for requiring ISA repayment and requires a limit on the repayment period, a six-month grace period, and an absolute cap on the amount that would be repaid. The bill also contains consumer protection provisions, by requiring that specified terms and conditions of an ISA be fully disclosed to a student prior to their entering into an ISA.

The bill also establishes a revolving fund at the participating campuses. Appropriated funds would be deposited into the revolving fund for the initial ISAs, and graduates' subsequent ISA payments would be deposited into the fund to provide ISAs for additional students. The participating campuses would report twice to the Legislature on the results of the pilot program.

Related Legislation. AB 1972 (Choi), in the Assembly Banking and Finance Committee, authorizes the use of ISAs, as specified, between two parties – as ISA funder and a receiver, for the purpose of funding costs associated with the receiver's postsecondary education.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file.

Opposition

None on file.

Analysis Prepared by: Chuck Nicol / HIGHER ED. / (916) 319-3960