Colleges and universities will have to begin looking elsewhere for funding and support as the Trump administration continues to shrink federal spending on higher education. While the administration has not moved to cut Pell Grants, it’s already disrupted the student loans space.
“Conservatives are looking to shrink the federal loan footprint and portfolio program,” says Steve Taylor, policy director at Stand Together Trust, a philanthropic organization. “We’ve got to be able to replace it with something that’s a positive alternative.”
Institutions will need to seek more partners in the private philanthropic space to help support student financial aid, and income-based loans are one way to maximize their contributions, according to these nonprofit leaders.
Income-based loans (sometimes referred to as income-contingent, earnings-based or outcomes-based loans) require students to pay back what they owe for their education interest-free only if their earnings reach a predetermined threshold, and the obligation expires after a certain period.
Nonprofit training programs are among the first educational programs to take advantage of income-based loans supported by philanthropy, but it’s slowly gaining traction among postsecondary institutions as well. Cape Fear Community College, in partnership with The Forward Fund, issued its first round of loans this January for short-term training programs.
“This is a private financing tool,” says Ethan Pollack, who runs an initiative at Jobs for the Future that explores new and emerging ways of paying for post-secondary education and training. “For a lot of the nonprofits that I work with that are offering this type of financing, their money comes from philanthropic sources through grants or impact investing.”
The University Business Podcast: Two big ways institutions must be innovative with upskilling culture
Not only are income-based loans affordable for students but they also maximize donors’ contributions. The funds require financial capital to get started and compensate for low-income students who aren’t required to pay back their loans. Repayments from successful students are recycled to support the program in perpetuity.
Google poured $100 million into three workforce training programs in New York in 2022. The fund, which takes advantage of income-based loans, aims to fuel wage gains topping $1 billion for 20,000 training program graduates, The New York Times reports.
Income-driven repayment is generally supported across ideological lines, Pollack says. Former President Joe Biden’s Saving on a Valuable Education (SAVE) plan is heavily income-contingent. While the GOP is currently trying to repeal it, their proposed replacement in the College Cost Reduction Act legislation is based on similar principles.
The Department of Education dolled out $85.8 billion worth of federal loans to 6.7 million students in fiscal year 2024, according to findings from the Pew Research Center.
“There’s a recognition that fixed payment loans are not a good way to finance an educational investment,” Pollack says. “Having something that’s earnings- or outcomes-based is just the best way of doing it.”
Income-driven loans offered through private lenders can inspire more accountability from colleges and universities to offer high-ROI programs, Taylor says. Through the federal loans program, “students can borrow up to hundreds of thousands of dollars [in graduate and parent PLUS loans] only to get fleeced in really low-performing programs that almost no return on investment.”
Private lenders offering outcomes-based loans will scrutinize the kinds of programs they are offering their money toward.
Pollack’s main concern is that private loans are never going to be quite as affordable as what the federal government is currently offering, thus hindering equitable access to education. “If you eliminate the student loan system entirely and leave it up to the private sector, there may be a lot of students that just can’t get financing. That’s kind of the most important role the federal government plays there.”
