Income share agreements (ISAs) are on the rise for college students seeking tuition assistance. Instead of giving students a loan, universities make a deal with them. They finance the student's tuition in exchange for some percentage of the student’s future earnings for some number of years, say 10% for 5 years (with some cap). By assigning a percentage share of future income, ISAs can function like non-voting shares in a company where the individual student is treated like a company.
These agreements reduce the burden of debt on students and removes the pressure to find just any job in order to satisfy a loan bearing down on them. This financing method also puts more responsibility on the school to help students succeed. The colleges now have “skin in the game”. (Critics, however, argue it’s a small step away from indentured servitude: students indenture themselves to patrons in the investor class.)
Like any debt instrument, the creditor (the school or “investor”) may want to cash-in their share ownership today instead of waiting years to collect payment. Normally the process to transfer ownership would be cumbersome and costly, but with a blockchain it can be done seamlessly.
IncomeShare has created an app to create income share agreements on Ethereum with just a few clicks. Leveraging OpenLaw, a legal agreements platform with associated smart contracts, the worded contract produced is legally binding, and the associated smart contracts give the parties additional functionality on the blockchain. Specifically, the application creates an ERC20 token that represents the shares in the loan recipient. These tokens can now be transferred freely by the school to other parties, effectively selling their stake in the ISA. They can sell small fractions to many different parties. For the student this process is transparent and they don’t have any additional overhead when repaying their obligation. Instead of paying the various holders of the ISA shares, the student simply pays that smart contract that is managing the agreement. The smart contract will divvy up the payment proportionally to the various stakeholders.
This application demonstrates one powerful feature of blockchains and cryptocurrencies: programmable money. The way money flows amongst many parties is programmable and by taking one action—e.g. by making a single payment, a series of actions are automatically set off, paying many parties that are entitled to it.
Dr. Lederer has over 15 years of technical experience in computer system design and programming. He has been teaching about blockchain and Ethereum for 3 years and recently co-authored Blockchain: A Practical Guide to Developing Business, Law, and Technology Solutions. Prior to working on blockchain technology, he worked at The Wall Street Journal, Morgan Stanley and BAE Systems, where he held a DoD TS (top secret) clearance to develop a novel mobile ad-hoc network for the US Air Force.