Providing quality education is a critical goal in the sustainable development agenda. Indeed, when people are able to get quality education they can break from the cycle of poverty and enjoy healthier and more sustainable lives. Education is also crucial to fostering tolerance between people for more peaceful societies.
OIC countries are far from Ensuring inclusive and quality education for all and for promoting lifelong learning. According to the 2018 report “Education Quality in the OIC Member Countries “, these countries have struggled with a lack of progress in improving education quality in the last two decades as shown in international assessments. Furthermore, the gap between OIC and non-OIC countries seem to have widened over time. Mobilizing financings for education is one of the challenges not only in OIC countries but also globally with education fees on the rise and students struggling with large debt balances. To illustrate, in the United States student debt reached a new height in 2018 — a $1.5 trillion. A typical student borrower will have $22,000 in debt by graduation.
Income sharing arrangements (ISA) seeks to address this issue by providing alternative financing schemes. Students financed through ISA do not pay tuition nor fees upfront. Instead, the financier (the university or any third party) gets a fraction of their salaries after graduation if certain conditions are met (typically, when the salary exceeds a certain threshold).
On paper, interest of all stakeholders in the ISA scheme seem aligned:
Students have incentives to join ISA, especially those from low and middle-income families;
- Universities using ISA financing are keen on attracting brilliant students who can make it to the job market. In addition, the university will make sure enrolled students are better prepared for the job market;
- Recruiters hire well-trained students with skills matching their expectations.
ISAs have gained prominence as an alternative to traditional debt schemes, especially in the US where they are provided by academic institutions (eg. Purdue, App Academy…) or financing start-ups (eg. GS2, Align…).
Given the shortcomings in education achievements in developing and developed economies, this product is worth developing by financial institutions along with the nonprofit sector. It will allow a better alignment of finance and SDG #4 (Ensuring inclusive and equitable quality education and promoting lifelong learning opportunities for all) and will provide financial institutions with the opportunity to diversify out of debt-like instruments.