Understanding Income Share Agreements: A New Model for College Financing

An income share agreement (ISA) is an alternative to student loans where a student agrees to pay a portion of their future income in exchange for funding for an education or training program.

ISAs have gained traction in recent years — especially in career training and bootcamp programs where students aren't eligible for federal financial aid. According to a study by the RAND Corporation, 72% of institutions offering ISAs are programs outside the federal financial aid system.

What are income share agreements?

ISAs are contracts between an educational institution or non-school finance provider and a student. The student receives money for their education or career training and, in return, agrees to give the other party a percentage of their future income.

Unlike student loans, ISAs don't require repayment until the borrower earns above a predetermined income level. This makes ISAs particularly appealing to students who want to avoid the burden of fixed loan repayments, which can be unmanageable during periods of low or unstable income.

The concept of ISAs dates back as far as the 1950s. Several Ivy League universities, including Duke, Yale, and Harvard, created income-contingent payments in exchange for education financing. The model has become more popular recently, largely due to rising student loan debt.

How do income share agreements work?

Here's a step-by-step breakdown of how ISAs typically work:

1. Application and approval: You apply for an ISA — usually through your educational institution or program. Approval is based on your future earning potential, tied to your chosen field of study and program outcomes.
2. Funding: Once approved, you receive funds to cover the cost of your education or training. You can use the money for tuition, books, supplies, and other related expenses.
3. Repayment: After completing the program, you enter a grace period during which you don't have to make payments. Once your income exceeds a specific threshold — usually $30,000 to $40,000 per year — you start repaying a fixed percentage of your income. This percentage generally ranges from 5% to 20% and continues for a set period, typically between 2 and 10 years, depending on the terms of the agreement.

Pros and cons of income share agreements

Income share agreements offer a unique alternative to traditional student loans, but like any financial arrangement, they have advantages and disadvantages.

Benefits of ISAs

• Flexible repayment: ISAs base payments on your income, so you only pay when you're financially able.
• No accrued interest: Unlike traditional loans, ISAs generally don't accrue interest. This lets you focus on your studies or career training without worrying about mounting debt.
• Income protection: If your earnings fall below a certain threshold, you may be able to pause repayment until your income recovers. However, months with no payments may not count toward your repayment term.

Potential drawbacks of ISAs

• Long-term commitment: ISAs can extend repayment over many years, even if you could quickly repay the amount borrowed. Make sure your ISA has a payment cap to limit the amount you'll need to pay under the agreement.
• High-income earners may pay more: If you earn significantly more than expected, you might end up paying back more than you would have with a traditional loan.
• Varying consumer protections: States vary in their approach to regulating ISAs. Without strong consumer protection laws, training programs and schools that offer ISAs may make misleading claims about job placement, program quality, and costs.

Comparing ISAs to other student loan options

Before committing to an ISA, you should compare the agreement to other common options like traditional student loans.

ISAs vs. traditional student loan payment plans

ISAs only require repayment once your income exceeds a predetermined threshold. On the other hand, traditional student loans typically have fixed monthly payments that start six months after you graduate or drop below half-time enrollment, regardless of your income.

Another way ISAs differ from traditional student loans is that unsubsidized federal student loans accrue interest while you're in school and during periods of deferment. Any unpaid interest gets added to your principal balance. ISAs don't accrue interest while you're in school, although they do have a cost, which can be high.

For example, say you enroll in an ISA that covers a $15,000 career training program and agree to repay 10% of your gross income over five years. If you earned $75,000 per year, you would repay $37,500. That works out to an interest rate of 44.328%, which is much higher than the rates on federal student loans.

Many ISAs have income caps, but that cap can be as high as three times your funding amount. Federal student loan borrowers can enroll in an income-driven repayment (IDR) plan, which bases your monthly payment on your income and family size. Private lenders do not offer this option.

ISAs vs. income-driven repayment plans

ISAs and income-driven repayment (IDR) plans base payments on your income. But IDR plans offer debt forgiveness after 10 to 25 years of payments (depending on your plan), while ISAs have a fixed repayment period with no access to forgiveness.

Who should consider an ISA?

ISAs may be a good option for you if:

• You're pursuing a high-demand field: If you need financing for training in a field like tech or health care, where your income prospects are high, you may be able to quickly reach the income threshold and repayment cap on an ISA.
• You're worried about being able to afford payments after graduating: If you're concerned about how much you'll earn postgraduation, ISAs provide peace of mind because payments are tied to your income level.
• Your school doesn't participate in the federal student aid program: In most cases, federal student loans are the best borrowing option when paying for college, as they offer fixed interest rates, flexible repayment plans, and the potential for loan forgiveness. But an ISA can be a good backup if your school doesn't qualify for the federal student loan program.

Before enrolling in an ISA, consider all your options, including federal and private student loans, scholarships and grants, and work-study programs. If you anticipate earning a high salary after completing your studies, you might pay more with an ISA than with a traditional loan.

If you go with an income share agreement, make sure the terms are clear, particularly when it comes to income threshold and repayment caps. And remember, while ISAs offer flexibility, they also require a commitment over several years. This could affect your ability to pursue other financial goals, like saving for retirement or buying a home.

FAQ

How much of my income will I owe under an ISA?

The amount of your income that will go to your ISA depends on the terms of your specific agreement and the program you choose. The payment typically ranges from 5% to 20% of your income, but payments only begin once your income exceeds an agreed-upon threshold - usually $30,000 to $40,000.

Can I pay off an ISA early?

You may be able to pay off an ISA early. However, that typically involves paying the full payment cap set by your contract. That could mean paying more than you would through regular payments based on your income. Critics of ISAs say this feature constitutes a prepayment penalty, which federal laws governing student loans don't allow.

What happens if I don't get a job after graduation?

If you don't get a job after graduation, you will typically still be required to repay your ISA. Some ISAs count months when you don't make payments toward your repayment term while others extend your repayment term. Make sure you read the fine print and understand how the contract works to avoid surprises.

Are ISAs available at all colleges?

No. According to a RAND Corporation study, only 28% of two- and four-year colleges and universities offer ISAs. They're more prevalent among workforce development and bootcamp programs that don't participate in the federal student loan program.

How do I know if an ISA is right for me?

An ISA might be right for you if you've already maxed out other options, including federal student loans, scholarships, grants, and work-study funding. Consider factors like your potential future earnings and the agreement terms before making a decision.