In September 2019, Vista Equity Partners CEO Robert F. Smith followed his commitment, by paying $ 34 million to pay off the debt of the roughly 400 students who graduated this spring from Morehouse College. Morehouse President David A. Thomas praised it as a “gift of liberation” for those graduates who are starting their careers debt free.

But what about other students?

While generous, Smith’s largesse was just a band-aid on the country’s $ 1.6 trillion student debt problem, the solution of which should not depend on luck, says Keith B. Shoates , Vice President of the Office of the CEO of Vista Equity Partners. “It was a transformational gift. But that doesn’t fit. It was for an institution, for a class of students.

Smith, the richest black person in America according to Forbes, is committed to reducing student debt, especially at historically black colleges and universities (HBCUs) where students graduate with a median debt of $ 29,000, is around 32 percent more than their peers from other institutions.

This summer, Smith helped set up the Student Freedom Initiative (SFI), a non-profit organization that aims to provide financial and professional support to students at HBCU. And last week, he announced the first nine colleges that will be part of the program: Claflin University, Clark Atlanta University, Florida A&M University, Hampton University, Morehouse College, Prairie View A&M University, Tougaloo College, Tuskegee University, and Xavier University of Louisiana. .

SFI is funded by a pair of $ 50 million in contributions – one from Smith personally, and another from the Fund II Foundation, where Smith is also chairman of the board. (Smith also admitted to tax evasion to federal authorities and paid a fine, but was not criminally charged.)

Starting in fall 2021, the SFI program aims to serve 900 juniors and seniors who pursue major studies in STEM, said Shoates, also executive director of SFI. (Here are the approved programs in all nine schools.) The plan is to eventually increase this number to support 5,000 students each year at all participating colleges.

A key component of the program is a funding vehicle that SFI officials say can help alleviate college debt in HBCUs. Called an “income-tested funding alternative,” it allows increasingly juniors and seniors to borrow up to $ 20,000 per year after exhausting available federal subsidized and unsubsidized loans, grants and other scholarships. by their colleges.

Some repayment terms are similar to those in revenue sharing agreements (ISAs). For every $ 10,000 that a student takes, he agrees to pay 2.5% of his salary each month for a specified period after getting a job, provided he earns at least $ 30,000. (So ​​if they take out the full amount available – $ 40,000 – the monthly payment would be 10 percent of their income.) All repayments go back to the SFI fund to support future students, with the goal of making it an autonomous fund.

But unlike ISAs which set the repayment cap as a multiple of the amount borrowed (the University of Utah is set at 2X, for example), SFI sets its cap below what a student would pay back. he was borrowing the same amount. as part of a Parent PLUS loan.

For example, a student taking out a Parent PLUS loan of $ 10,000 would end up repaying about $ 12,904.80 over a 10-year period (or $ 107.54 per month), at the current interest rate of 5.3%. . By borrowing that same amount from SFI, if the student’s income-based repayments are $ 107.54 per month, they would meet the repayment obligation within a shorter time frame and end up paying. less in total over the same 10-year period.

“Our pricing is such that the terms will be better than taking out a Parent PLUS loan,” says Fred Goldberg, a former IRS commissioner who is now an outside lawyer for the Student Freedom Initiative. He says the financial modeling is based on “conservative” assumptions, including a reduction in salary projections to account for the impact of the pandemic on jobs and wages.

This modeling was done in partnership with the Jain Family Institute, a New York-based nonprofit that has assisted other programs including Purdue University and the San Diego Workforce Partnership, research and design their ISA terms.

Beat Parent PLUS

When it comes to student financing options, Parent PLUS loans are generally viewed as one of the last resort after students have reached their federal loan limit (typically $ 5,000 to $ 7,500 annually). As the name suggests, this option allows parents to borrow money to finance their child’s college education, but on less favorable terms than federal loans. Interest rates are higher and interest accrues as soon as the loan is taken out, not after a student has graduated.

Families can borrow more with a Parent PLUS loan, but critics say it has made the debt problem worse. A report of the College Board found that the average Parent PLUS loan was $ 17,220 for the 2018-19 school year, which is 2.6 times the average undergraduate student loan. About 3.6 million families now hold more than $ 100 billion in Parent PLUS debt, according to the National Student Loans Data System—And it is estimated that more than 1 out of 8 will be default.

HBCU families shoulder a disproportionate share of this debt. A report of the United Negro College Fund found that nearly twice as many HBCU undergraduates rely on Parent PLUS than their non-HBCU peers. A 2019 analysis by USA Today found that the percentage of families with Parent PLUS loans in HBCUs is double that of all colleges combined, despite the fact that over 40% of black families with such loans earn less than $ 30,000 per year.

“Each year, thousands of black HBCU graduates across America enter the workforce with an overwhelming debt burden that delays future decisions and prevents opportunities and choices,” Smith said in a statement. “The [Student Freedom] The initiative is deliberately designed to correct historic economic and social inequalities and to provide a sustainable and scalable platform for investing in the education of future black leaders. “

In addition to promising a lower overall cost compared to Parent PLUS loans, SFI’s repayment terms and protections could also make it attractive to students and families, says Kevin James, CEO of Better Future Forward, a goal-oriented organization. nonprofit that partners with college prep programs to provide ISAs to students who attend. University.

Under an SFI, monthly payments do not begin until one begins to earn more than $ 30,000 and payment obligations end upon bankruptcy, permanent disability or death, or after 20 years. . Students can also defer up to 12 monthly payments for any reason.

“When people look at these options, I think income-tested protections are the most important aspect, not whether one slightly outperforms the other in cost,” says James.

More than an ISA?

Today, more than 50 US colleges offer student revenue sharing agreements. More recently, Robert Morris University announced that its students can withdraw up to $ 5,000 per year through its ISA Colonial Success Fund program.

Although SFI’s funding terms have repayment terms similar to most ISAs, Shoates prefers not to use this term. This is because, he says, the students who receive the funds are also eligible for other services, including technology and career development opportunities offered by SFI partners. They include companies from The Business Roundtable, an association of business leaders, who have promised to provide internship opportunities and discount laptops and other devices to students. Others are committed to offering technological infrastructure support services to schools that are part of the network.

The long-term goal, adds Shoates, is to extend financial terms and other benefits to all colleges in the SFI network – not just HBCUs, but also other minority-serving institutions that could be part of the program at the future.

Providing student support services is essential to making any income-based repayment tool work, James says. As of fall 2017, Better Future Forward has provided ISAs to 162 students who also participate in regional college preparation programs, such as One Million Degrees and College Possible, which offer mentoring and coaching services. About 90 percent of beneficiaries are still in school or have graduated.

“These programs need to be fueled by student performance and their ability to successfully transition to employment,” says James. “Funding is not the only challenge, and we need to think about more than money.”

Editor’s Note: This article has been updated to note Robert Smith’s admission of the tax evasion charges to federal authorities.