When a school or investor puts money into ISAs, you might expect them to try to get everyone to major in high-earning fields like computer science and business. The idea is that the more the students earn, the more the investors get back.
This concern makes sense conceptually, but there are a few reasons why it likely won’t play out in actuality.
First, caps and other contract design decisions, as mentioned above, will prevent investors from making an excessively high return on students, which will diminish this motivation. The end goals determine the product, and the ISAs that we build and advocate for are not intentioned to find the next huge startup founders and get equity on their success, but to function more like insurance for students for whom the system fails: students who attend schools that don’t care about their outcomes; students who end up with way more debt than they can pay.
We also design pricing models with a modest return on investment, so that we can minimize the number of years and the percentage of income required of students. These are not meant to be a wild money-making venture, but to have broader benefits for the whole higher ed system.
Third, in this early phase of ISA market-building, we’d most recommend them as a substitute for Parent PLUS and private loans – not for federal direct loans. In general, it’s wise for students to take out their federal direct loans first, and add ISAs for other expenses they need to cover. The amounts that investors can expect to earn simply aren’t that large.
Fourth, even though data is publicly available on the highest-return majors, students still select a wide array of majors: financial outcome matters to students, but is only one of many elements that factor into the choice of major. Certainly, we want everyone to have lives that afford them flexibility, and since ISAs work best when most people make some kind of living, we’re comfortable with the fact that they encourage participation in the labor market. Art majors and English majors can make good livings and afford the lives that they want. The student debt crisis in this country isn’t a result of too many humanities majors: it’s the consequence of a system where predatory, low-quality colleges (like the for-profits) have little accountability; college costs have risen to the highest levels in history while public investment is at historical lows; lenders can take advantage of students; and servicers can make money even when students are struggling.
It is important here, as everywhere, to emphasize that understanding of ISAs is very limited, both by the small amount of research, and the small number of examples of ISA programs.