Last year, billionaire Robert Smith shocked about 400 Morehouse College graduates (and people around the world) when he announced that he would pay off their student debt.

Today, he returns with an initiative that he believes will address the challenges faced by black student loan borrowers on a broader scale. The non-profit initiative, called the Student Freedom Initiative, aims to “create a sustainable model for financing higher education through loans,” he told TIME in an interview.

Smith plans to do this by helping students pay for their education through what the SFI calls income-tested funding. Essentially, a participant would agree to repay the money as a percentage of their income over a certain period of time.

The organization is still in the process of determining the terms and conditions of the financing, which will initially be offered to juniors and seniors studying science, technology, engineering and mathematics at 11 historically black colleges and universities beginning in the fall of 2021.

Consumer advocates are watching closely

Consumer advocates are closely monitoring the roll-out of the initiative because they are concerned that the product may resemble some of the products they have found troubling in the student finance sector.

“The potential of this type of funding mechanism has a role to play in reducing racial disparities in student loans – it will depend on who has access to it and their repayment experience,” said Dominique Baker, professor of educational policy at the Southern Methodist University.

Monitor for similarities with revenue sharing agreements

In particular, consumer advocates are concerned that the SFI program appears to share some features with revenue-sharing arrangements. These agreements, which are increasingly common in universities across the country, allow borrowers to finance their tuition fees by pledging a percentage of their future income.

Advocates and some prominent legislators have criticized organizations that propose ISAs for the vagueness of their terms, the risk that students will pay more than they could pay under a traditional loan, and the trap of indebtedness of borrowers over a long period of time. They also stated that ISAs risked discriminating against certain types of borrowers by tailoring funding conditions to the students’ field of study.

Although the SFI has not made much of an announcement about the terms of the product it plans to offer, those working on its design say it will differ from ISAs in key respects.

For one thing, everyone who is eligible to participate in the program will have the same terms and conditions; there will be no different income percentages or payback periods for different majors,” said Michael Stynes, executive director of the Jain Family Institute, a non-profit research organization. The institute, which partnered with SFI in the design of the program, has also provided expertise to IAPH funds and revenue-based funding initiatives.

In addition, the cost of a participant will never be higher than the cost of a Parent PLUS or private loan, measured by the Annual Percentage Rate or APR,” Stynes said. In some SSAs, the APR participants pay can vary and is often quite high depending on their salary. During periods when participants are not earning income, they will not be required to make payments, including during the entire term of the contract, Stynes said.

“He retains much of the risk protection” of ISAs, Stynes said, “but doesn’t pose as much risk to students”

Consumer advocates say they will monitor how the SFI addresses some of the more difficult issues related to ISAs. These include issues such as How will borrowers’ incomes be assessed in order to decide how much to repay? What will be the discretionary income of a borrower whose income is low under the terms of the agreement? How long will the repayment period be? Who will the IFC hire to collect payments from borrowers? Since this product would be a complement to federal student loans, would there be a scenario where a borrower would be eligible to pay nothing on their federal loan but would still have to pay for their SFI obligation?

Joanna Darcus, a lawyer at the National Consumer Law Center, criticized ISAs for not disclosing to students the cost and risks of their products and for circumventing consumer protection laws governing loans by defining their products differently. Ms. Darcus said there was still time, before the SFI began supporting students for its product, to keep away from these issues, adding that she was anxious to see the terms.

“In these situations, words and small print always matter,” Darcus said. “Especially when a product is intended to serve a particular community or communities, as consumer advocates we need to make sure that we look at whether that product actually brings value and is likely to promote prosperity for the people it purports to serve

The Student Debt Crisis Among Black Borrowers

The purpose of the SFI is to help alleviate the student debt crisis among black borrowers, who struggle disproportionately with student loans due to generations of wealth inequalities and discriminatory practices.

The wealth gap between black and white families means that black students have less room to pay for their education and therefore generally have to borrow more. In addition, because of inequalities in the K-12 education system and in the university admission process, black students have historically had limited access to wealthy institutions that can afford to offer generous financial aid.

Instead, the schools they disproportionately attend, including HBCUs, have fewer resources available to provide financial assistance to students. Finally, when Black students graduate, they may face well-documented discrimination in the labour market, which means they have less money to use to pay off their student loans.

The purpose of the SFI with its program is to help solve some of these problems. Because black families often need funding for university that exceeds the maximum available federal student loans, they are forced to turn to other, riskier products. Parent PLUS loans have higher interest rates than federal student loans and offer very limited repayment flexibility. Private loans work in the same way.

Research indicates that when Parent PLUS loans are often used as a tool to provide liquidity to white middle and upper class families, they may be the only option available to black families with less wealth. SFI hopes to ease this burden with its product.

SFI and its funders are confident that they have developed a structure for the student assistance fund that will offer attractive terms to participants and be self-sustaining, Stynes said. The program has received a $50 million pledge from the Fund II Foundation, a charitable organization of which Smith is president, and its supporters have pledged to raise an additional $500 million by the end of the year. The idea is that the fund will be able to continue and even expand to support STEM students at all HBCUs through efficient access to capital markets and participant payments.

To date, the only large-scale remedies to the black student loan crisis have been through private philanthropy. The fact that it is too costly to make university and student debt affordable for black students and families without strings attached “shows the limits of using private solutions to solve what is fundamentally a public policy problem,” said Ben Miller, vice president of post-secondary education at the Center for American Progress, a left-wing think tank.

Despite SFI’s confidence, Miller said he is not sure how much leeway he has between offering students a good deal and creating a product that can earn enough money to at least sustain the fund. If that’s possible, then Miller wonders who the product will be used for.

“You can replace unaffordable debt with slightly more affordable debt,” Miller said. “But you still have the political problem and I don’t think there’s a private sector solution to that.”

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