KENNY MALONE, HOST:
Lauren Neuwirth is a junior at Purdue University. She studies biological engineering and food processing sciences which means she knows a lot about how food works.
JACOB GOLDSTEIN, HOST:
As a technical expert, is there some artificial flavor that's just, like - where they just nailed it?
LAUREN NEUWIRTH: I would say, like, banana. Banana is actually pretty cool from a chemical standpoint. It's, like, a volatile compound.
GOLDSTEIN: Lauren, obviously, is super into this stuff. And she knew that Purdue was a good place to get into the food engineering industry, but she couldn't figure out how she was going to pay for Purdue.
NEUWIRTH: Yeah, it was extremely stressful. Like - I was telling Kenny before, every time I'd go into financial aid, I'd just start crying because it's just so much money. And like, I come from, like, a single-parent household, so it's hard to rationalize, like, asking my mom for, like, extra money.
MALONE: When Lauren went off to Purdue, her mom gave her $30,000 dollars. That was her college fund.
GOLDSTEIN: On top of that, she was able to get some government-backed student loans. She's gotten paid internships in the summer. But all of those things combined are not nearly enough to pay her way through school.
NEUWIRTH: So I went to financial aid. And I was, like, all set to basically like join the Army because they said that they would pay for my school. So I basically went in there. And I was like, OK; I need some money. Or I'm calling the Army recruiter back and I'm joining the Army because I don't know what else to do, and school's, like, 30 grand a year.
MALONE: And that was when someone at the financial aid office told her about a new way for students to pay for college. It was so new that even the person at the financial aid office didn't know all of the details.
NEUWIRTH: They said, like, they didn't know a ton about it and that it was kind of a new program and I should, like, go home and kind of look into it. And then I did. And I was like, yeah, I think this does sound better than the military. So I applied, and I got approved. And then that's how I've been, like, paying for my last two years of school.
GOLDSTEIN: Purdue gave Lauren a bunch of money - tens of thousands of dollars. It's not a scholarship. It's not a loan. There's no set amount of money that Lauren has to pay back. Instead, Lauren had to promise that she will give Purdue a chunk of her income for years after she graduates. The more she makes, the more Perdue makes. It's kind of like Lauren sold stock in herself.
Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.
MALONE: And I'm Kenny Malone. Today on the show, this idea of selling stock in yourself - or something like it - has been kicking around for decades. Now it's finally starting to happen.
(SOUNDBITE OF MUSIC)
MALONE: This thing Lauren Neuwirth did, it is called an income-share agreement. And it is a new way to help pay for college. But it is based on a pretty old idea. One of the people who helped kind of rediscover this and dust it off is a man named Miguel Palacios.
MIGUEL PALACIOS: Jacob, hi.
GOLDSTEIN: Hey, Miguel. How are you?
PALACIOS: Good. Thank you. How are you?
MALONE: Miguel is a professor of finance at the University of Calgary. He grew up in Colombia. And in the mid-1990s, he heard about this weird thing happening in the news involving David Bowie.
(SOUNDBITE OF SONG, "THE MAN WHO SOLD THE WORLD")
DAVID BOWIE: (Singing) We must have died alone.
PALACIOS: So David Bowie raised capital for himself. And the special thing about this capital-raising was that he pledged his future earnings.
GOLDSTEIN: This was in 1997. And by this point, David Bowie had been a rock star for, like, 30 years. He had this huge catalog of perpetual hits - "Under Pressure," "Starman," "The Man Who Sold The World."
(SOUNDBITE OF SONG, "THE MAN WHO SOLD THE WORLD")
BOWIE: (Singing) The man who sold the world.
GOLDSTEIN: And every time somebody bought an album or played one of those songs on the radio, Bowie got a little money. He got royalties.
MALONE: So what Bowie decided to do at this point was instead of get a little money every year, he wanted a lot of money now. So he said to investors - if you give me a lot of money now, I will give you a chunk of my royalties for the next 10 years.
GOLDSTEIN: And it worked. Investors gave Bowie $55 million. And in return, they got a nice steady stream of income for the next decade.
MALONE: When Miguel Palacios heard about this Bowie thing, he thought immediately that this kind of deal would be great, not just for rock stars but for regular people. In particular, he thought of college students.
PALACIOS: And it all came from experiencing the fate of several classmates, when I was an undergrad student, who were doing OK but basically had to drop off because they couldn't survive financially. And these people, I knew they were highly capable; they were very talented. They were possibly much more talented than I was. And they were giving up on a degree that in Colombia is very, very valuable.
MALONE: So you heard about the Bowie bonds. And you thought about your friends, your classmates who had had to drop out because they didn't have enough money. And what did you think?
PALACIOS: I thought, they should be able to do something like what David Bowie did.
GOLDSTEIN: Not exactly like what David Bowie did - but Miguel wanted to give college students a choice, a choice that companies have had for hundreds of years. If you're a company and you need money, you basically have two options.
Option No. 1, debt - get a loan; sell a bond. If you do this, you have to pay back everything you borrowed plus interest.
MALONE: Option two, equity - sell stock to investors. If you do this, investors - people - give you money. And you get to keep it. This is not a loan. You don't have to pay it back. But the people who gave you the money, who invested in you, get a share of your future profits. The more money you make, the more money you have to give your investors.
GOLDSTEIN: Ordinary people don't have this choice. If you're a regular person and you need money, all you get is option one. You can borrow money if somebody is willing to lend it to you. If you don't want to borrow money or if there is nobody who is willing to lend you money, you're out of luck. That is why Miguel's friends who couldn't get loans had to drop out of school.
MALONE: So Miguel keeps studying this idea. He goes off to grad school, and he learns that people have tried sort of similar things in the past but not really what Miguel was thinking of. He also finds a couple people trying to get companies off the ground doing this sort of thing in the '90s, but nobody is getting very far.
GOLDSTEIN: And at some point, Miguel happens to come across this chapter in a book by Milton Friedman, the famous economist.
PALACIOS: Randomly - so I was reading "Capitalism And Freedom." And...
GOLDSTEIN: As one does.
PALACIOS: As one does.
PALACIOS: And it was there, right? So there's this chapter, and there it is. It's laid out very clearly, the whole idea explained.
MALONE: Friedman just says it. We should have a way that you can give a student money in exchange for a cut of his or her future earnings.
GOLDSTEIN: So you just happened to be reading this book at this moment?
PALACIOS: Yes, serendipitously.
GOLDSTEIN: What did you think when you came upon this in the book?
PALACIOS: Two things. On one hand is - oh, I guess it's not an original idea.
PALACIOS: On the other hand - oh, cool - Milton Friedman also thought it was a good idea. Yeah, yeah.
MALONE: The big moment for Miguel came when he met a guy named Felipe Vergara - also Colombian, very entrepreneurial and interested in education.
PALACIOS: Yeah. I described what I was writing about.
PALACIOS: And he thought it was very interesting. And - but this is where the entrepreneurer is different from the Ph.D. student. I was thinking that I would spend several years studying and learning and then designing. And he said, why don't we do it? Let's try to have the first contracts by next month. And that was the birth of Lumni.
MALONE: Lumni is the company that Felipe and Miguel founded to do this thing Miguel had been dreaming of - to make income-share agreements for students.
GOLDSTEIN: They did a little pilot program in Chile, where Miguel had worked when he was in his 20s. They funded six students $10,000 in total.
PALACIOS: Well, that went great. And that was to say the first - the beginnings of a track record that allowed Lumni to start raising more capital to finance other students.
MALONE: That was in 2001. Today, almost 20 years later...
PALACIOS: It operates in Colombia, Peru, Chile, Mexico and, to this point, something of 10,000 students financed through these contracts.
MALONE: In all, they've provided about $50 million - five-oh (ph) - in financing. And the investors who've put money in, they are getting paid back.
GOLDSTEIN: But Lumni has not really cracked the United States market yet, a place where, obviously, people have huge problems paying for college. After the break, income-share agreements come to the U.S.
(SOUNDBITE OF MUSIC)
UNIDENTIFIED PERSON #1: All right. One moment - he's still in a meeting right now.
GOLDSTEIN: (Inaudible) Fine.
UNIDENTIFIED PERSON #1: One moment, please.
UNIDENTIFIED PERSON #2: Media who are taking note, Purdue received a record number of applications...
GOLDSTEIN: Purdue University - remember - is the school that is using an income-share agreement to fund part of the education of Lauren Neuwirth, the food engineer who we talked to at the beginning of the show.
UNIDENTIFIED PERSON #2: Whatever your pursuit...
MITCH DANIELS: Mitch Daniels.
MALONE: Mitch Daniels is the president of Purdue.
GOLDSTEIN: Hi. It's Jacob Goldstein at NPR.
DANIELS: I'm so sorry to hold you up.
GOLDSTEIN: Oh, no problem.
MALONE: Purdue, as far as we can tell, is the first big four-year university in the U.S. to try income-share agreements. And this happened because, in 2015, Mitch Daniels went to Washington to testify at a congressional hearing on higher education. He talked about a bunch of different issues. And just in passing, he mentioned income-share agreements.
DANIELS: It was almost a throwaway line. But as soon as the hearing was over, I was swarmed with, first of all, reporters who were curious about the concept. And then shortly thereafter, I began to hear from people who had hoped that somewhere someone would try to get this - the concept airborne.
MALONE: So Mitch went back to Purdue and asked a team of people to figure out if Purdue could do this and, if so, what students might benefit.
GOLDSTEIN: And just to be super clear here, let's step back for one moment. College is ridiculously expensive, and income-share agreements are not going to solve that.
MALONE: Also, there are better ways to pay for college if you can swing them. Government-backed student loans are better than income-share agreements for most students. Also, grants and scholarships are obviously better for students than income-share agreements.
GOLDSTEIN: But for lots of students, students like Lauren Neuwirth, grants and scholarships and government-backed loans and summer jobs all put together are not enough to pay for college. Those students often wind up taking out additional private loans. And for those students, Purdue decided, income-share agreements might be a good option.
DANIELS: All I know is there are millions of students who are taking very expensive loans who might be candidates for this and who might find it to their advantage.
MALONE: Purdue launched its income-share agreement program in 2016. And so far, they've funded about 500 students. And the details of how this program works are really interesting, so we're just going to run through some of those details to explain how it actually works for students like, say, Lauren Neuwirth.
NEUWIRTH: I, like, printed out all my forms that I signed and everything last night. And I was kind of like...
GOLDSTEIN: Yeah. You have it there? Are you...
NEUWIRTH: Yeah, I'm pulling it out.
GOLDSTEIN: (Inaudible) Great.
MALONE: The school gave Lauren $50,000, and she promised to pay roughly 15 percent of her income for eight years after she graduates.
GOLDSTEIN: So the more you make, the more you have to pay.
GOLDSTEIN: But also, the less you make, the less you have to pay.
NEUWIRTH: (Laughter) Yeah. But I mean, we're hoping to make a good amount of money.
MALONE: One of the most interesting things about the program is that the percentage of income that students have to promise to pay depends on what their major is. We talked about this with Mary-Claire Cartwright, who manages the Purdue program.
MARY-CLAIRE CARTWRIGHT: I mean, we know that a chemical engineer's traditional salary out of school is going to be different than, let's say, an English major.
GOLDSTEIN: And by different, you mean way higher.
CARTWRIGHT: Correct - I mean, for most people. Right?
GOLDSTEIN: (Laughter) I say that as an English major, yes.
MALONE: Here is the thinking behind how Purdue set this program up. They want everybody who participates to ultimately pay back the same amount. Now, English majors are probably going to earn less. So if they want money now, they, have to promise a higher percentage of their income in the future.
GOLDSTEIN: On the other hand, engineers are probably going to earn more, so they are on the hook for a lower percentage of their future income.
MALONE: And this feels like - I don't know - a little weird, maybe a little judgy. Most schools, for example, don't charge different tuition rates for different majors. They just set one average for everybody. So why not do that with income-share agreements?
GOLDSTEIN: So you could decide to just take the average income of all graduates and say OK, we're going to base the number based on that.
GOLDSTEIN: No matter what you're majoring in, we're going to charge you based on that. I mean, that's an option.
CARTWRIGHT: It is. But it would be one that might cause there to be more adverse selection into the cohort.
GOLDSTEIN: Ah. So you mean that if you average it out, all the English majors would say, like, sure, that sounds like a sweet deal.
GOLDSTEIN: And all the chemical engineering majors would be like...
CARTWRIGHT: Ah, I'm not so sure.
GOLDSTEIN: ...No thanks. I think I'm just going to take a loan.
CARTWRIGHT: Right, right. Correct, correct.
GOLDSTEIN: That's interesting.
MALONE: Adverse selection is this general kind of problem that occurs when exactly the wrong kind of people sign up for something. And one concern with income-share agreements is that even when you charge different majors different rates, you could still have this adverse selection problem.
GOLDSTEIN: Yeah. Like, say I'm an English major. And I'm planning to go to law school and get some high-paying lawyer job. I'm going to make a lot more than the average English major. So for me, an income-share agreement is probably not a good deal. Right? I'm going to be on the hook for a lot of money. On the other hand, if I'm going to go, say, you know, be a teacher - get a good job but one where I don't make a ton of money, in that case, an income-share agreement may be a good deal for me.
MALONE: Now, Purdue doesn't have any control over what you do after you graduate. They're not going to tell you to take the higher-paying job over a lower-paying job.
GOLDSTEIN: But there are some terms in the contract to catch, you know, like, super-slackers.
MALONE: I mean, if someone told me, like, you're going to pay a percentage of your income for the 10 years after you graduate, I would initially be like - great. So I'm going to Europe for at least two of those years.
CARTWRIGHT: Great. You know, we want people to experience that. And you've paused the contract...
CARTWRIGHT: ...Because you're not seeking employment.
GOLDSTEIN: Paused the contract. The students who do this, the students like Lauren who get income-share agreements, are on the hook for eight years after they graduate. It's like there's this clock running down. But Purdue will stop the clock if the students - if, say, Lauren decides, you know, to bum around Europe or, for that matter, to go to grad school.
MALONE: On the other hand, if Lauren gets fired and she's looking for a job, the clock keeps running. And since she doesn't have income, she doesn't have to pay.
GOLDSTEIN: On the other - I guess - other hand, if Lauren becomes, you know, some food tech superstar - if she becomes a banana in a billionaire, she does not have to kick back 15 percent of that huge windfall to Purdue. She does not have to give them - whatever - $100 million. There is a cap on what she and everybody in the program has to pay. And that cap is 2 1/2 times the amount that Purdue gave her in the first place. In Lauren's case, it's $125,000.
MALONE: After she graduates, she'll have to tell Purdue - or the company that's running this program for Purdue - how much she is making. And if Lauren just refuses to pay, they can come after her and demand that she pay 2 1/2 times the amount they gave her in the first place, no matter how much she's making at that point. So those are some of the terms, the terms that Lauren Neuwirth signed up for.
GOLDSTEIN: How do you feel about that?
NEUWIRTH: I mean, honestly, not great (laughter) because, like, no one wants money taken out of their check every month. But at the same time, like, maybe I don't make a lot coming out of college. OK. Well, then we're still doing fine. I'm not going to, like, default on my loans.
GOLDSTEIN: The first students in the program have already graduated. They're making payments, seems to be going well. But really, it is too early to say how this is going to work. You know, will students like Lauren feel good about it in the end? Will the people who put money into the program get their money back? How profitable will it be? Will it be the kind of thing that draws in big-money private investors, or is it going to remain this kind of semi-philanthropic, niche thing?
GOLDSTEIN: But for sure, income-share agreements are a thing now. They're popular with vocational schools like those coding boot camps. Colleges all over the country in Utah, Colorado, Pennsylvania and New York are all launching their own income-share agreement programs.
(SOUNDBITE OF BRYAN JAMES SAMMIS, OLEN MATTHEW KITTELSEN AND SAMUEL GRANT BERESFORD'S "ABC")
GOLDSTEIN: You can communicate with us via email or social media. We're on your standard suite of social media @planetmoney. Our email is email@example.com.
BRYANT URSTADT, BYLINE: I am just, like - I am like a marionette that is propped up by, like, all these different people here. And it's just the craziest feeling.
MALONE: That is Bryant Urstadt, PLANET MONEY's editor. The show was produced by Darian Woods. Our supervising producer is Alex Goldmark.
GOLDSTEIN: Thanks to Tonio DeSorrento of Vemo Education and Julie Margetta Morgan of the Roosevelt Institute. PLANET MONEY videos are a thing in the world. They're fun, they're short, and you can see them at npr.org/planetmoneyshorts.
MALONE: I'm Kenny Malone.
GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.
(SOUNDBITE OF BRYAN JAMES SAMMIS, OLEN MATTHEW KITTELSEN AND SAMUEL GRANT BERESFORD'S "ABC")
NEUWIRTH: Like, my first summer, I did production. And then my second summer, I did quality.
GOLDSTEIN: Does that mean you were, like, tasting the chocolate?
NEUWIRTH: Oh, yeah. There was always lots of tasting.
MALONE: Have you ever seen "I Love Lucy"?
NEUWIRTH: Yes. And I know exactly what you're talking about because that's literally what I did in production.
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