Despite sky-high tuition, colleges are gasping for air: Credit rating firm Moody’s estimates that the cash and investment reserves of at least 80% of universities aren’t keeping up with inflation. That bleak picture could get even worse as the demographic pressures and a tight labor market exacerbate the financial straits of many institutions. The traditional financing model for higher education is breaking down—for both schools and their students.
While higher ed is struggling, the business of learning is booming. The increasingly turbulent and fast-paced economy has created the need for developing high-demand skills and for better evidence that schools are helping learners achieve strong workforce outcomes. A multitude of innovative education providers have come roaring in to address those needs, providing more, and higher-value, learning options before, during, after and even instead of college. Surprisingly quiet in the midst of this ruckus are the colleges themselves.
Traditional institutions that want to participate and flourish in this more accessible, value-driven learning market should shed their enrollment-driven financing models in favor of an outcomes-based one. Income-share agreements, or ISAs, have started to proliferate among innovative education providers and could give colleges a pivotal role in a new golden age of higher education.
Are colleges confident enough to ‘eat their own cooking’?
With an ISA, students hold off paying tuition today in exchange for a paying fixed percentage of their income tomorrow—if that income exceeds a certain minimum. In other words, ISAs tie the school’s financial fate to that of its graduates. This shifts the risk of poor workforce outcomes away from students and on to schools, incentivizing higher ed to help students not just enroll, but stay, graduate and then get good jobs.
Traditional universities claim that a liberal arts education goes beyond providing vocational or employment-oriented skills that may have a shorter shelf life. It helps students develop durable soft skills, including critical thinking and problem-solving.
But according to employers, employment-oriented skills and deeper reasoning skills are not at odds. In a recent Society for Human Resource Management survey of 1,028 HR professionals, the three groups of skills ranked as most often missing among job applicants are problem-solving, critical thinking, innovation and creativity; the ability to deal with complexity and ambiguity; and communication.
With an ISA, students hold off paying tuition today in exchange for paying a fixed percentage of their income tomorrow.
If colleges actually practice what they preach, they should embrace ISAs and the accountability they incentivize. ISAs financially reward institutions that deliver durable soft skills. As institutions collect tuition revenue for individual programs through ISA payments, they will start to recognize which programs yield better student-learning outcomes—and value for students—and which do not. This transparency helps institutions carry out their mission statements while stabilizing their balance sheets.
To get in the game, changes have to be more than skin deep
Taking full advantage of ISAs will require colleges to reevaluate their business models. ISAs will generate program-level outcomes data on the long-term financial value that individual academic programs create for students. This could trigger difficult discussions that challenge institutional traditions—especially the ones that don’t prioritize career services. However, such business model changes have the potential to fundamentally redefine the value of higher education, and are needed to ensure that traditional colleges are not left behind in the new era of lifelong learning.
ISAs can also help colleges build entirely new business models, serving students who could be over-served by a full degree program. One interesting model involves an arrangement between the San Diego Workforce Partnership and the University of California San Diego Extension . With federal workforce funds drying up, nonprofit San Diego Workforce Partnership decided to use ISAs, with funding from a number of philanthropic donors, to help adult job seekers pay for courses that teach in-demand skills at UCSD Extension. As students leverage these skills to land good jobs, their ISA payments will cover their own tuition costs and fund the education of future job seekers.
Read: College tuition partners
UCSD Extension gains a pipeline of adult job seekers, encouraging innovation that is centered on the needs of a new learner demographic. The university continues its traditional undergraduate offerings. UCSD Extension has an opportunity to let this ISA-financed partnership drive needed, challenging conversations around institutional change.
Moving toward a new era
The existing federal financial aid regime spawned an enrollment-driven model that increased access to higher education but did so in a manner that failed to hold schools accountable—and deposited the risk of poor outcomes on students’ shoulders. Its flaws are becoming increasingly apparent as our higher ed system grows more complex and is asked to serve a more diverse range of students.
ISAs address many of those flaws—protecting students from getting financially steamrolled and helping institutions to consider, and hopefully, implement, the necessary business model changes they will need to thrive. American colleges and universities have remained strong leaders during previous economic revolutions. It would be a shame if they did not at least join the next one.
Richard Price is a research fellow for higher education at the Clayton Christensen Institute. He focuses primarily on how new and innovative models can reshape higher education.