Sunday, March 25, 2018

Protect Your Children from Income Share Agreements

Loans are Understood and Predictable

Many children have been hurt by large student loans.  I remember an article about a medical doctor who borrowed so much money to become a doctor that she would be paying on her loans to the day she died and would never be able to own a home.

Many young people do not understand loans.  Their parents need to guide them through the process of borrowing money for college.  There have been many night-mare stories of huge debt and meager incomes.  But there are formulas and on-line calculators that allow you to calculate the monthly bill for a loan given the loan amount, interest, and the length of the loan payoff.  With a tool like this you can analyze your potential debt before you commit to the debt. If you google "Loan Repayment Calculator, " then you can see something like this:
(Click on the image to see it expanded.)  You can see that a 6% loan of $20,000 will take $491.05 monthly to pay off, meaning you pay back $29,463, which is $9,463 more than you borrowed.  Many kids graduate with more than $20,000 of debt and many young people will find paying 4491.05 a steep cost.

A $40,000 yearly income, and 28% taxes means a young person will have (40000 * (1 - 0.28))/12 = $2400 per month income and $491.05 is 20% of the monthly income.  Try living in an urban area for less than $1200/month for rent and utilities.  Now you can picture $491.05 as 41% of the remaining $1200 a month after rent and utilities.  A student loan is a serious commitment, but mathematics and planning can lead one to project the economic consequences, including the total cost of the loan.

Income Share Agreements are New and Poorly Understood

Some universities started debt instrument called a Income Share Agreement (ISA)as an alternative to student loans.  Investors wanting to make money off of your children have turned to Congress to pass laws making it easier and safer for them to loan money to your children.

After reading the details of these bills, here are my concerns.
  1. The congressional bills strip away state laws that protect your children from excessive interest rates or claims against their income.
  2. Your children cannot escape a bad ISA through bankruptcy.
  3. These ISAs have an equivalent interest rate and the interest your children pay on ISAs is not tax deductible like a regular loan.
  4. Senate bill S.268 amends the Investment Company Act of 1940 to strip away protections we might have from this law. 
Details from the bills (and web links to them) are at the bottom of this blog posting.

Banks can already loan money to our children, but banks are regulated.  Now a new batch of investors want to own our children's debt without the regulations currently in place to protect our children.  No one can imagine at this time how bad this could be for our children.  We can write our congressmen to protest these bills, but we must surely warn our children to avoid these debt instruments until the dangers are understood.

Your friend and neighbor,

Senate Bill S.268 — 115th Congress (2017-2018)

Introduced in Senate (02/01/2017)

Investing in Student Success Act of 2017

This bill authorizes an individual (i.e., a student) and another person (i.e., an investor) to enter an income-share agreement (ISA) in which the student agrees to pay a percentage of future income, for a specified period of time, in exchange for funds to pay for postsecondary education, workforce development, or other purposes.

An ISA that complies with specified terms and conditions and meets certain disclosure requirements is a valid, binding, and enforceable contract and is not subject to state laws that limit interest rates or regulate assignments of future income.

The bill amends the Internal Revenue Code to include an ISA as a qualified education loan (a qualified education loan is not dischargeable in bankruptcy), but it prohibits a tax deduction for interest paid on an ISA (interest paid on a qualified education loan is tax deductible).

The bill amends the Investment Company Act of 1940 to exclude as an investment company any person whose business substantially consists of making ISAs.

House Bill H.R.3145 — 115th Congress (2017-2018)

SECTION 1. Short title; table of contents.

(a) Short title.—This Act may be cited as the “Investing in Student Achievement Act of 2017” or the “ISA Act of 2017”.

SEC. 201. Lawfulness of contracts; preemption of State law.

Any income-share agreement that complies with the requirements of section 102 shall be a valid, binding, and enforceable contract notwithstanding any State law limiting or otherwise regulating assignments of future wages or other income.

SEC. 202. Preemption of State law with respect to usury.

A Qualified ISA shall not be subject to State law with respect to usury, unless such State law was issued after the date of the enactment of this Act and such State law expressly states that it is intended to apply to income-share agreements.

SEC. 203. Preemption pre-existing State laws with respect to ability-to-repay and licensing laws.

A Qualified ISA shall not be subject to a State law with respect to “ability-to-repay” requirements, and an ISA funder issuing a Qualified ISA shall not be subject to any State law with respect to licensing or registration, unless such State law was issued after the date of the enactment of this Act and such State law expressly states that it is intended to apply to income-share agreements.

Money from a Humble Business

We should tell our children not to turn their backs on a humble business.  Educated middle class parents want their children to go to a good college in order to be hired by a good company.  But sometimes the people who start businesses do not graduate from college.  The most famous college drop outs are Bill Gates (Microsoft), Michael Dell (Dell Computer), Mark Zuckerberg (Facebook), and Larry Ellison (Oracle).

We can add Wayne Huizenga to the list of successful businessmen who dropped out of college.  His obituary is "Wayne Huizenga, Entrepreneur Behind Blockbuster and AutoNation, Dies at 80" by James R. Hagerty, Wall Street Journal, 3-24-2018 pages B1 - B2 in the print edition.

Mr. Hagerty (1937 to 2018) dropped out of Calvin College in Grand Rapids, Michigan.  His grandfather ran a garbage hauling business in Chicago.  Mr. Hagerty joined the Army reserves and after that he got a job managing a trash-hauling business in Florida.  Soon, he started his own trash-hauling business, expanding to 40 trucks by 1968.  Eventually he merged his trash-hauling business with his grandfather's business and went public as Waste Management.

To cut to the chase, Mr. Hagerty started Blockbuster, selling it for $8.4 Billion to Viacom. Then he started AutoNation and Extended Stay America.  He had other businesses and you can read about them in his obituary.

Wayne Huizenga became a wealthy man because he was willing to work in the humble business of hauling trash.

I think everyone should experience some college, but graduating from college is not necessary for success.


Tuesday, March 20, 2018

Leadership: The West Point Lecture by William Deresiewicz

William Deresiewicz was a professor at Yale.  He quit and wrote a book called Excellent Sheep: The Miseducation of the American Elite and the Way to a Meaningful Life .  I am finding it an interesting book, although I do not agree with his views on the Liberal Arts education.  Dr. Deresiewicz was invited to speak at West Point.  Here are two copies of his speech.  This one is in PDF so you can download it.  This copy is at the American Scholar website, March 1, 2010.

Here is the major thrust of his concerns.  He is talking about students at Yale.

So what I saw around me were great kids who had been trained to be world-class hoop jumpers. Any goal you set them, they could achieve. Any test you gave them, they could pass with flying colors. They were, as one of them put it herself, “excellent sheep.” I had no doubt that they would continue to jump through hoops and ace tests and go on to Harvard Business School, or Michigan Law School, or Johns Hopkins Medical School, or Goldman Sachs, or McKinsey consulting, or whatever. And this approach would indeed take them far in life. They would come back for their 25th reunion as a partner at White & Case, or an attending physician at Mass General, or an assistant secretary in the Department of State.

That is exactly what places like Yale mean when they talk about training leaders. Educating people who make a big name for themselves in the world, people with impressive titles, people the university can brag about. People who make it to the top. People who can climb the greasy pole of whatever hierarchy they decide to attach themselves to.

But I think there’s something desperately wrong, and even dangerous, about that idea

He raises excellent objections to elitist education, but I do not agree with his solutions.  He cannot offer a good solution because, as an English professor, he is too much a part of the problem to see a solution.

Because he spoke at West  Point, Dr. Deresiewicz mentioned General David Petraeus in his talk, but his references to the general struck me as shallow, just rehashing commonly available facts from newspaper articles. 

This article gives you the flavor of his Excellent Sheep book.  The most important take-away from Deresiewicz is that elitist education is deeply flawed.  We must remember that Vietnam was an elitist war.  It was run by elitist Harvard and Yale graduates like Robert McNamara (Harvard MBA), General William Westmoreland (Harvard MBA), McGeorge Bundy, Walt Rostow and Paul Warnke.

Many parents in Plano would like their children to go to Harvard or Yale, but it is important to recognize that there are serious problems with the education offered at Harvard and Yale.