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Aditya Damani

Founder, Credit Fair

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Income Share Agreement -An Alternative To Education Finance We Must Consider

The rise of online and mentor driven education with companies such as AttainU, Pesto, Masai, Board Infinity etc shows that talent can be groomed for the new age jobs.

The usual growth trajectory for an individual is to get educated, find a good job or start a business, settle in life and witness their kids do the same in future. With education being the first and ultimate step towards success, every individual wants to study at a top school or university. But with the cost of education skyrocketing and the pandemic worsening the financial situation of the average household, many students have been forced out to drop out of college and engage in meagre income jobs.

With every passing year, one may hear stories of parents dropping out their kids from colleges due to financial constraints. There have also been instances where the kids are forced to drop out in the middle of the year as parents could not afford the exorbitant coaching fees. As per a survey, one-fourth of the boys and 17.7% of girls drop out from different levels of education owing to financial reasons. Clearly, education today remains out of reach for many. Even if scholarships are available at many universities, not everyone would be eligible to get it.

What one may not realize is that India’s growth today is based on the young individuals getting good job opportunities. Dropout of students affects the economic performance, labour market and social progress of the country. On the other hand, one may also come across well-educated individuals finding it difficult to get a job in spite of too many job opportunities. Companies today face a huge shortage of highly skilled individuals. Though there is a dearth of educated people out there, only a handful of them are skilled enough to get a job.

To meet up to the varying needs of a business, there is a requirement of individuals having good knowledge of data, digital, development and other related fields. The rise of online and mentor driven education with companies such as AttainU, Pesto, Masai, Board Infinity etc shows that talent can be groomed for the new age jobs.

Parents today highly rely on education loans as a means to educate their child in India or abroad. However, the high interest rates combined with the processing fee do cost a lot. Moreover, even banks shy away from approving education loan applications easily owing to the high default rates. Education loan being an unsecured loan, disbursal rates have fallen down significantly in the past few years. As per estimates, the default rate of education loan is 6-9% in comparison to car at 4% and home loan at 1%.

However, one possible solution for students looking to pursue further studies is income share agreement which is a contract through which the student receives a sum of money to pursue higher education. After the completion of the course, the student has to repay the loan amount using the percentage of income he draws from his salary. The loan amount is offered based on future income, without any collateral. The borrower only has to pay after the placement and start the EMI payments after getting salaries. Loan tenure offered for repayment is usually up to 3 years for a loan of Rs. 1.5L to Rs. 2.5L.

The good thing about this loan is that the repayment does not start immediately, but only after the borrower starts drawing a minimum salary i.e mentioned as threshold limit in the agreement. With this financial product, the responsibility of fee collection can be outsourced to fintechs and NBFCs and the Edtech can get the required capital to reinvest and scale the business further.

Income sharing agreement is a successful model across the globe, especially in the US. It is not just the students and university/edtech who benefit with this product, but also the employers as they get access to a well trained resource.

By outsourcing the responsibility of fee collections to fintechs/NBFCs the Edtech can get the capital today to reinvest and scale the business. Through income sharing agreement financing, the youth today can get access to high quality jobs and education, without having to worry about the finances.

To conclude, ISA comes across as an innovation in an important sector that can expand the pool of skilled working individuals. It helps democratise access to high quality jobs and education due to relevant financing options. Since this model is not more prominent in India, universities and edtechs will have to play a major role in helping NBFCs and banks gain traction. Furthermore, ISA can be a golden opportunity for students as it can help them get closer to their dream of pursuing quality education at an esteemed university

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house



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