The Real Solution to Student Debt Crisis: Blockchain-based Income Share Agreements

“Ripple invests $50million to top 17 universities around the world to boost blockchain and crypto adoption”– That has been one of the main highlights for this week in the Blockchain and crypto world. In doing this, Ripple aims to support and increase blockchain research, technical development, and innovation within the blockchain industry. As much as Ripple caught our attention in the blockchain world, there are other blockchain startups that have been working on training students. A great example is RSK, under their RSK Educate project which aims to provide students and educators with blockchain resources to accelerate blockchain-related learning. Judging from all these investments in blockchain education, the word “blockchain” will not be associated with being a buzzword anymore. Rather, there will be an increase in use-cases within this space. One of the sectors that will definitely benefit from this is the student financing sector-specifically income share agreements. So, if you are in this sector; in any part of the world, you’d definitely want to find out how.

First and foremost, it’s no secret that the student finance system is broken. This is mainly due to the default rate of student loans. Statistically speaking, in the US, Student Loan Hero reported that the total U.S. student loan debt is currently $1.48 trillion. Moreover, the default rate is currently $74.9 million. Those who do pay, spend an average of 10 years paying of thousands of dollars back to the lenders. It’s due to these statistics that we see people moving towards cheaper alternatives to education. These are short programs mostly financed by the Income Share Agreement. The Income Share Agreement finances students for their period of study based on a repayment contract that is based on the student’s future income. The student pays based on the percentage set in the contract and the terms, e.g. a student can pay 10% of their income for 10 years back to the ISA company or investor. This is different from student debts because, with ISA, the student only pays if they start generating the contract’s pre-determined income. If the student graduates and does not get a job, they are not expected to pay until they get employment. The student can also opt to pay the maximum amount required by the ISA all at once.

From the investor’s side, they are sure to get paid once the student starts earning an income. If the student earns a high income, the investor will also get a high amount. The question that could be raised here is; “What is the certainty that the investor will get back their money once the student is employed”?  Thus far, it’s all based on trust and we will be exploring how blockchain can be used to make this process better.

ISA is a new innovative model, but is it really secure in this instance?

ISAs have defined rules that govern the interactions between the student and the investor. Currently, the interaction between the students and the investors lacks credibility and is costly. The investor, who is normally an independent entity from the educational institution needs to be updated of the students progress throughout their education journey. This includes information pertaining to the student’s status in regards to their major, progression to the next year, GPA, gap year and whether the student has dropped out or not. This is not where it ends as when the student graduates, the sponsor needs to know the student’s employment and income status. All this information is then used to determine how much the student will pay back to the investor based on the percentage on the contract. However, the information might change during the term of the ISA contract and the student will be liable to inform the investor. Furthermore, is there that much trust in the world? Will the student really say, “hey, I got promoted from my $5,000 paying position for a $15,000 one, so now I have to pay a higher amount”? Maybe that could happen, but let’s not bank on it.

How can blockchain make this process more secure?

Smart contracts can replace the physical contract between the student and the independent investor. A smart contract is a digital contract that is built on a blockchain. It runs on rules of an agreement between parties, automatically verifies the rules of the agreements and lastly executes the terms agreed. Due to the fact that it’s built on a blockchain, it becomes immutable-meaning that it cannot be tampered with or broken. Moreover, it is distributed- meaning that the outcome of the contract is validated by all the relevant parties. This means that if anyone tries to change the information that exists, this would be detected by everyone on the network and mark the change as invalid.

Judging from the mentioned greatness, are there any projects working on this.?

Thus far, there is a working paper titled Picotte: A Model for Post-Secondary Education Income Share Agreements Based on Blockchain Smart Contracts. It shows how ISA can potentially leverage the blockchain technology and Smart Contracts to ensure security between the parties:

In essence, the smart contract could be integrated within the Education Provider’s system. The Education Provider will be liable to update the student’s status on the school records. This is inclusive of the student’s start date, GPA, internships if any and gap years if the student takes any. The institution will also be liable to update the system once the student graduates from the school. Due to the smart contract being synchronized with the record system, it will automatically be updated. The use of this smart-contract will ensure the reliability of the information between the investor and the student.

The minute the student graduates, the smart contract then notifies the investor automatically. It then becomes the student’s duty to inform the investor the minute they get employed and are earning an income.

Once there is employment, there could be a smart contract between the employers and the banks of both the investor and the lender. The employer would need to have a data system that has the employment status of the lender and the salary the lender is receiving. This data will only be accessible to the employer and the lender’s bank. Once the money gets to the lender’s bank account, the smart contract automatically executes the payment percentage and sends it to the investor’s bank account. This ensures that the correct payment is made to the investor.

This is the current solution that can be adopted by ISA companies to ensure low default rates. The current uptake of ISA’s is really high and if it’s meant to be a solution for the college debt crisis, it might as well just do more than bank on trust. Blockchain truly is the answer to the underlying issues that could potentially attack this innovative approach of financing education.



Nini Rose Moru

I only love my bed and blockchain, I'm sorry.

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