More College Students Selling Stockin Themselves Amid higher-education borrowing boom, programs aim to capitalize on graduates future earnings By Douglas Belkin

Aug. 5, 2015 12:26 p.m. ET

Elida Gonzalez feared drowning in college debt on her road to a middle-class job, so instead she sold investors a piece of her future.

The now-23-year-old daughter of a farm worker from Santa Maria, Calif., signed up with 13th Avenue Funding, borrowing $15,000 to complete her bachelors degree at the University of California, Santa Cruz. The Sacramento-based nonprofit group agreed to fund her college expenses in exchange for a share of her future earnings in an arrangement called an income-share agreement.

I was able to trust them, which is really hard for me to do, said Ms. Gonzalez, who could pay back more than the cost of a traditional loan if she does well, but is on the hook for only 5% of her income for 15 years if she doesnt. Repayments dont kick in until she makes at least $18,000 a year.

Earning a college degree has become crucial to attaining a decent salary and middle-class lifestyle, many economists agree. But skyrocketing tuition costs and Americans growing reliance on student debt have also increased the risks in a labor market where some college degrees have little worth and studies show that nearly half of all recent college graduates have jobs that dont fit with their degree.

The desire of some students to transfer at least part of that risk has given rise to a variety of government, university and market-based experiments with such income-share agreements, in which investors essentially buy stock in the students. At stake: a fundamental shift in the way Americans finance higher education.

Critics say the idea that students could end up paying more than they would under a typical loan is predatory and unfair. It feels icky to me, said David Bergeron, a former Obama White House education adviser.

He also believes it could destroy part of the nations social contract. If such arrangements became broadly used, he said, it could undermine the federal financial-aid system by creaming off the most successful students and leaving less-successful ones who may have trouble repaying their loans.

Still, several states are debating programs that would provide students an education with no money down in exchange for a slice of their income for a set number of years after graduation. President Obama has championed federal income-based repayment plans, which set borrowers monthly payments as a percentage of their income and unlike income-share plans include debt forgiveness. Enrollment in income-based repayment plans has been so strong that some critics worry that taxpayer costs are getting out of hand.

Income-share agreements are the free-market cousins of these government

programs. Investors have launched them in Chicago, Sacramento and another is soon to open in Austin, Texas. In Indiana, Purdue University President Mitch Daniels is aiming to start a program for Purdue students in the spring called Bet on a Boiler, referring to the school nickname.

Clearly there is an explosion in student debt and the default rate is a concern, said Mr. Daniels. That got me seriously thinking about this, not as replacement [for federal loans] but as a new option.

The idea has been around since the 1950s, but it wasnt until student debt began to explode that entrepreneurs began to experiment with the model. In 2002, a Vanderbilt University professor co-founded a for-profit company called Lumni, which has made about 7,000 loans to students in four countries in South America and has a rate of return of between 10% and 15%.

The concept has also proven hard to execute. Oren Bass, co-founder of for-profit human capital investor Pave, said his company received well over 10,000 applications for its income-share program for college between 2012 and 2014. It was able to fund only 70 students because he couldnt attract enough institutional funds to scale the program to a viable size.

Pave eventually pulled the plug on the program, Mr. Bass said, partly because big investors feared a lack of legal protections if a borrower declares bankruptcy or refuses to pay.

U.S. Rep. Todd Young (R., Ind.) filed a bill to bring clarity to income-sharing arrangements last month, although previous efforts have failed to win passage. The bill says borrowers dont have to pay back any of their income unless they earn at least $18,000. It also caps the length of time a borrower is obligated to pay to 30 years and states the debt is not dischargeable in bankruptcy.

Andrew Davis, founder of Educational Equity in Chicago, which offers income-share agreements, has addressed the issue of legal clarity by so far limiting investors to his family and friends. He further tries to reduce risk by entering into agreements only with Chicago teachers who want to attend graduate school at one of four university programs designed to train school principals. He hopes to expand soon to cover nurses and other professions with strong demand.

If you start a new medical-insurance business you dont go looking for the sickest people to insure, he said.

Among his customers is Alaric Blair. Mr. Blair, 49, was an elementary-school writing and English teacher who wanted to become a principal. A 2008 bankruptcy prohibited him from even getting a credit card, let alone borrowing the $10,000 he needed to finish his masters degree to enter administration.

Mr. Davis lent him the money for 5% of his income for 5 years. Mr. Blair said he expects to pay about $20,000 for the loan.

I was running out of options, said Mr. Blair, who earned his second masters in June 2014 and is now an assistant principal at a Chicago elementary school. This was a great route for me.

Meanwhile, under the terms of her loan, Ms. Gonzalez could pay as much as $60,000 for the $15,000 she borrowed from 13th Avenue under the terms of her loan.

But if Ms. Gonzalez, who hopes to one day return to school and become a physicians assistant, ends up paying more than she would have for a conventional loan she is OK with that. Im willing to pay it forward and give someone else a chance to go to school, she said.

More College Students Selling Stockin ThemselvesAmid higher-education borrowing boom, programs aim to capitalize on graduates future earnings