Income share agreements: A game-changer for student finance?

Nguyen, a top university student from rural Vietnam, may forgo his academic dreams due to soaring tuition fees, limited financial aid and the heavy burden of student loans. His story echoes nationwide, where financial barriers keep many talented students from higher education.

As Vietnam’s universities gain financial autonomy, tuition costs have surged, leaving countless students struggling to afford their studies.

Meanwhile, government-backed student loans, introduced in 2007, remain rigid and insufficient. Is there a better way? Income share agreements (ISA), a financing model that ties repayment to postgraduate income, could offer a solution.

An ISA allows students to fund their education without traditional loans. Instead, they agree to pay a fixed percentage of their income after graduation for a period. If they earn below a predetermined threshold, they pay nothing.

Unlike conventional loans, ISA repayments adjust with income, preventing graduates from being burdened with unaffordable debt.

This model has been implemented worldwide. For example, Purdue University’s Back a Boiler programme helped students cover tuition in exchange for a share of their future earnings. CHANCEN eG operates ISAs as a cooperative fund in Germany, where graduates’ payments sustain future students.

Additionally, Colombia’s Lumni programme has been a pioneering model, demonstrating how ISAs can thrive even without a well-functioning national loan programme. These cases illustrate how ISAs can reduce financial barriers while incentivising universities to improve job placement outcomes.

A compelling alternative

Vietnam’s higher education landscape is rapidly changing. As universities shift to cost-sharing models, tuition fees have surged, with top-tier institutions charging upwards of US$2,250 per year, accounting for 40% of the average worker’s annual earnings.

The government introduced a subsidised loan programme in 2007 through the Vietnam Bank for Social Policies to support students. However, despite its long-standing presence, the programme has struggled to keep pace with rising education costs.

Loan amounts are currently capped at VND4 million per month (about US$160), often covering only a fraction of tuition and living expenses at top-tier universities.

Moreover, eligibility is limited primarily to students from low-income or officially designated poor, near-poor or average-income households, excluding many middle-income families who may still find higher education unaffordable.

While the interest rate is relatively low – 0.65% per month – interest does accrue during the study period, and repayment typically begins soon after graduation, regardless of employment status.

These limitations make the programme insufficient for many and risky for students without immediate job prospects, potentially discouraging capable students from pursuing higher education.

ISA presents a compelling alternative. It allows students to pursue their education without upfront financial barriers and aligns their payments with actual earnings.

Moreover, ISA shifts the focus from enrolment numbers to graduate success, encouraging universities to improve job placement support, curriculum relevance and industry partnerships. This model benefits students and ensures that universities are invested in their graduates’ employability.

Regulatory uncertainty

While ISA appears promising, significant hurdles must be addressed for successful implementation in Vietnam.

Regulatory uncertainty is a primary concern, as Vietnam lacks a legal framework for ISA. Should it be classified as a financial contract, an investment vehicle or a loan? Clear regulations are needed to protect students from predatory contracts while ensuring investor confidence.

The answer shapes the model and the rules needed. Government-managed ISAs could ensure broad access and fairness but might get bogged down in bureaucracy. University-led ISAs could tie funding to student success and build accountability, though limited resources might hinder the scale of roll-out.

Private market ISAs could draw big investments and innovation but risk predatory terms without strong oversight. Clear regulations must define ISAs – whether as financial contracts, investment vehicles or something else – balancing student protection with investor confidence.

Another challenge is income transparency. A major hurdle in enforcing ISA is tracking post-graduation income.

Unlike countries with centralised tax reporting, Vietnam has a significant informal labour market where salaries are not consistently reported. Without a reliable income tracking system, ensuring fair and accurate repayments will be difficult.

Critics also further contend that ISAs bring moral hazards, potentially steering students towards lucrative fields at the expense of personal fulfilment or may even resemble contemporary indentured servitude.

However, these concerns can be mitigated with proper contract structuring. Setting reasonable repayment caps, limiting repayment periods and ensuring agreement transparency can prevent undue financial burdens.

ISAs should be designed to empower students rather than trap them in long-term financial commitments. For ISAs to scale, there must be some incentives and motivations for private investors and financial institutions to be willing to fund students’ education.

A pivotal role for government

To launch ISAs effectively, pilot programmes should be introduced in fields with strong job placement rates and income potential, such as in science, technology, engineering and mathematics (STEM) fields.

However, this focus carries risks: prioritising certain fields may skew funding towards labour-market darlings, making less labour-market-orientated majors, such as humanities or social sciences, costlier and less accessible, thus limiting students’ intellectual freedom.

To address this, a balanced ISA model should ensure that funding opportunities are not exclusively tied to projected earnings but also consider societal value and academic diversity.

The government must play a pivotal role in defining ISA contracts, establishing repayment guidelines and capping obligations to protect students.

A robust regulatory framework should ensure transparency and prevent exploitative terms, whether ISAs are administered by public entities, universities or private investors.

However, if ISAs remain privately run, enforcing such regulations could prove challenging, making clear oversight essential to safeguard borrowers.

Equally vital for the ISA model to be fair and scalable, universities and financial institutions need to work with tax authorities to develop a system that accurately tracks graduates’ earnings.

This is no small challenge in Vietnam, where a large informal economy makes income reporting inconsistent. However, voluntary income disclosures, employer reporting incentives or digital financial tracking systems could help bridge this gap.

Without an effective solution, enforcing equitable repayment structures will be difficult, potentially deterring both investors and students from participating.

Focus on student success

ISAs can also make universities more accountable by shifting their focus from mere enrolment to post-graduation success. Traditionally, universities focus primarily on enrolment rather than employment outcomes, but ISA reframes this dynamic by tying financial returns to student success.

This is most evident in university-run ISA programmes, where institutions bear the financial consequences if graduates struggle to find employment or earn a low salary.

Similarly, government-backed ISAs could incorporate this ‘skin in the game’ principle by linking public funding to job placement metrics.

However, ensuring accountability in privately managed ISAs presents a challenge since investors, rather than universities, assume the financial risk, and institutions may lack the same incentive to improve career services or job placement efforts unless regulatory measures explicitly tie their funding to graduate success.

Workforce preparation

Regardless of the ISA model, policies should encourage universities to strengthen industry partnerships, enhance career support and refine curricula to better prepare students for the workforce.

By aligning incentives across different ISA structures, higher education can become more outcomes-driven, ultimately benefiting both students and society.

ISAs offer Vietnam a unique opportunity to reform higher education financing while ensuring that universities are accountable for student outcomes. By aligning incentives among students, educators and investors, ISAs have the potential to make education more accessible and sustainable.

However, careful implementation is crucial to address regulatory challenges, ensure income transparency and build trust.

If done right, ISAs could be a game-changer, transforming Vietnam’s education sector into one where students graduate with opportunities, not debt.

Thong Minh Trinh is a PhD student in higher education at the University of California, Berkeley, United States.

This article is a commentary. Commentary articles are the opinion of the author and do not necessarily reflect the views of University World News.