By Dr. Matt Will
President Mitch Daniels is testing a program which, if it works as planned, will provide Purdue students with another way to pay for college, reduce the effective interest rate for low-wage earning graduates, and virtually eliminate the risk associated with paying back loans. All of this will be accomplished with neither the creation of a new federal agency nor the expansion of the national debt.
The Back-a-Boiler program allows students to receive funding from Purdue University in exchange for an agreement to pay the school a percentage of future income. The example used is repayment of 4% of a graduate’s earned income over nine years in exchange for the school providing $12,000 in funding. There is a cap of $30,000 in repayments and students making under $10,000 of income pay nothing.
By making repayment based upon a percentage of earned income, the risk associated with student debt is transferred to Purdue University and students need not worry about the myriad of problems associated with non-repayment of a loan. Administrative costs are substantially less than both the current private loan mechanism and the bloated Department of Education system. And as it says clearly on the Purdue website, THIS IS NOT A LOAN.
While this is not a loan, some quick calculations reveal that students who make $44,731 a year would end up paying an amount equal to the 6.84% currently offered on Plus Parent loans. Students below this income level make out better, while those who make more fair worse. When considering the cost of a private loan can be around 9.8%, a student would have to make a starting salary over $50,000 before a student loan is a better deal than the Back-a-Boiler program. Beyond the numbers, loans still represent a significant financial risk to the individual borrower.
Even for people who plan to make big bucks, Back-a-Boiler is a winner. If you walk out of college making over $100,000 you will end up paying the equivalent of 29.6% interest. Ouch! Yet, you are still only paying 4% of your annual earnings. And don’t forget, Purdue gambled on your education and should share in your success. If promised a six figure starting salary right out of college, you would be hard pressed to find anyone who would not take that deal. I would even venture to say, a grateful alum would probably offer to pay more. Why? Because that is what grateful alumni do.
Unfortunately, sound financial management and innovation is often viewed skeptically in higher education. Faculty critics are quick to make specious arguments against such programs, while offering nothing but a bigger federal bureaucracy and government handouts in response. Since the federal government nationalized the guaranteed student loan industry with the Student Aid and Fiscal Responsibility Act of 2010, the Department of Education budget has grown 28% to over $87 billion and a recent estimate is that over $200 billion of student loans managed by the federal government will not be repaid. While not a fix-all, the Purdue program does its share to alleviate the problem.
The Back-a-Boiler program is a work in progress and there will be some obvious tweaks along the way. No doubt, improvements will be made. That being said, it is hard to find fault with a program that helps students pay for college, reduces the burden of personal debt, eliminates the risk of repayment, builds a strong alumni base, and does it all without asking for another federal handout. But then again, it does not end hunger or create world peace, so how good can it really be?
Sample payment plan http://www.purdue.edu/backaboiler/disclosure/approval.html
ISA Contract http://www.purdue.edu/backaboiler/disclosure/contract.html
Matt Will is an Associate Professor of Finance at the University of Indianapolis
Twitter: @DrMattWill
