We all know how daunting, complicated, and downright confusing it can be to pay for a college education. You have multiple options to choose from when funding your degree: grants, scholarships, student loans. But there’s another option – income share agreements.
Aside from the numerous options, there are also lots of questions you need to find answers to. For example, should you go for subsidized or unsubsidized, federal student loans or private, fixed or variable rates, etc.?
Income share agreements are pretty new, but this method of payment is increasing in popularity. We will show you everything you need to know about income share agreements and help you make an informed decision.
What Are Income Share Agreements?
An income share agreement (ISA) is similar to a student loan. However, you pay for your higher education after graduating and finding a job, not while you’re still enrolled.
You then pay a fixed percentage of your salary over a certain period or until you reach the amount you’re required to pay back. For example, you can pay 5% of your salary for ten years or until you repay 2.5 times the original amount you took using the ISA program.
As stated seconds earlier, ISA and student loans sound similar, but only on the surface. There are some essential differences you need to be aware of.
First, ISAs don’t come with interest. That means if you get a job with lower pay, you may not pay back everything you received for funding. However, if you end up with a high-paying job, you could pay more than you received, even though ISAs come with a payment cap.
The Income Threshold Called Salary Floor
Usually, the ISAs come with an income threshold you need to meet, called a salary floor. Here’s how it works. If you earn less than the threshold you get in a given year, your payment requirements through the ISA would be waived that year, causing your term to be extended.
You can stop the ISA program at any time. But you’ll have to pay the maximum repayment amount for your plan, and it has to be upfront. In addition, some degree programs and schools offer ISAs as a way to enroll new college students.
Some companies also offer ISAs to employees who take the time to pursue advanced higher education or learn new skills while they work full time.
Students Are Slow In Adopting The ISAs
Regardless of the schools and companies adopting this new model, students have had slower adoption.
Of course, ISAs offer numerous benefits, but there are also potential flags you need to watch out for. The primary concern is that there are so few regulations to protect students who opt for ISA.
ISA terms may include terms that are far too extended, resulting in massive total repayment payments. Sometimes too, the repayment percentages can be too high. Furthermore, ISAs may not permit things such as deferments, forbearance, and prepayment like student loans.
And because of how the ISAs are marketed, students may not be fully aware of what they’re getting themselves into. As a result, some even worry that some ISA programs may prioritize well-performing students or those pursuing high-paying career fields.
What To Know Before Signing Income Share Agreements
The ISA terms vary by program. So you’ll need to know and understand everything you can about any income share agreement before you sign up. Here are some of the terms you’ll need to know before you make your decision:
Income Share Percentage
This refers to a fixed percentage of your monthly pre-tax income in the future that you’ll agree to share during the contract term. These percentages can range from 2.5% to a massive high of 17.5%.
The monthly payment is the amount you pay back every month after graduating from college during the ISA contract term. For example, if your Income Share Percentage is 5% and you earn $5,000 a month, your Monthly Payment would be $250.
Minimum Income Threshold
The minimum income threshold is also called the Income Floor, and it refers to the minimum income where you won’t have to make any monthly payments. Usually, it ranges from $20,000 to $50,000, but sometimes, it depends on the degree program and company.
Furthermore, besides protecting students earning less, the income floor incentivizes a college to align risks with their students. Thus, aside from promoting the future income you could earn, it also guarantees it, in some cases.
The payment cap refers to the amount you and the school or company agreed to be capped. That way, you’ll not be penalized if you make a higher net income. In addition, this payment cap or ceiling gives you some protection if you successfully make enormous monthly payments.
Usually, the payment cap ranges from 1.5 to 2 times your tuition amount.
The payment window refers to how long your ISA contract lasts. It usually ranges from two to ten years. Some ISAs count the months where you’ll earn less than the salary floor when you start paying back the amount.
Other institutions do so to extend the repayment terms.
You repay a fixed percentage of your salary each month for a particular set of months. Each of these monthly payments is regarded as one of your Required Payments.
We can’t predict what will happen in the future. But you might fall sick, and that might leave you unemployed for a certain period. It’s also possible that your overall future income may drop under the Minimum Income Threshold.
In such instances, your payment will automatically be waived without incurring any penalty. It’s not like the traditional student loans where you’ll have to apply for a deferment. With the ISA, your payments are suspended automatically during periods of financial hardship.
If you think about it, it’s like an insurance policy that protects your private student loans.
But what you keep in mind is that not all ISAs offer the same value or flexibility. And that’s because there can be massive variations in long-term costs. So before you proceed, make sure you compare numerous offers before you make any final decision.
There are a few instances where your monthly payments get paused. Let’s go through some of them:
- When You return to school, it’s essential to learn new skills and continue your education if you’re preparing for a career transition. However, when you decide to further your education or go back to school for another degree, your ISA payments get deferred when you enroll. Likewise, if you transfer to a new school after taking out an ISA, your payments will be in deferment while you pursue your degree.
- Military or volunteer service. Your monthly payments won’t be a burden when you serve in the military. You also won’t have to worry if you’re on active duty or volunteering because your payment will be in deferment.
- Medical leave. If you go for medical leave, your ISA will be in a grace period. That will help you focus on recovering yourself before you start making monthly payments again.
Schools That Offer Income Share Agreements
Even though ISAs have been steadily growing for some years now, most students are uninformed of them.
In 2016, Purdue University launched an ISA program called Back a Boiler program, and it’s one of the first and most notable ISA programs.
Examples of schools that offer ISA programs include:
- Colorado Mountain College
- Purdue University
- University of Utah
- Lackawanna College
- Clarkson University
- Norwich University
- Messiah College
- Allan Hancock College
However, numerous schools provide their ISA options via Vemo Education. Since 2015, Vemo Education, a third-party ISA provider, has partnered with more than 70 universities, training programs, and colleges.
Sometimes, non-profit companies like Better Future Forward and for-profit companies like Stride Funding offer ISAs to students directly. Also, other non-profit organizations like Student Freedom Initiative began offering ISAs to STEM students at historically Black universities and colleges in 2021.
How You Can Satisfy Your Income Share Agreements
One of the huge factors that distinguish ISAs from private student loans is how they’re satisfied. Of course, aside from the inherently built-in protections. There are three different ways you can use to satisfy your ISA program:
First, you have to make the required number of payments.
As explained earlier, you repay a percentage of your future income every month for a certain number of months. Each of these monthly payments is regarded as one of your Required Payments.
So all you have to do is pay all the Required Payments, and you would have satisfied your ISA amount.
Pay the Maximum Payment Cap
The Max Payment Cap is built into your income share agreement. And it’s what you’ll need to make your ISA payments. It’s inbuilt protection for high salary earners. That way, you’ll not be punished for earning more than expected.
Usually, the Payment Cap is more than the Funded Amount. So when you reach your Max Payment Cap, you satisfy your ISA amount. The Funded Amount is the amount your college gives you for their program.
Reach the end of the Payment Window
Another way to complete your ISA is to reach the end of the Payment Window. The institution will give a period to retrieve your Max Payment Cap or Required Payments. However, if the Payment Window ends without satisfying these two, the school absolves your ISA.
Private Student Loans Vs. Income Share Agreements
Private Student Loans
When it comes to private student loans, you’re required to make your monthly payments whether you have a good job or not. So regardless of what happens, a bill will come in every month, and your options become limited if you can’t pay.
Also, private student loans accrue interest with time. And that means your payments will accumulate with time.
Income Share Agreements
If you don’t get a job right after graduation, you’ll get flexibility in your monthly payments. If you make less than what you and the university agreed on (Minimum Income Threshold), your payments will be paused, including when you’re not employed.
You don’t have to make any payments until you find a job and earn above the income threshold. In other words, if you enroll in an ISA, you’ll only repay the money if you’re making over a specific amount.
And those with highly successful jobs never pay back more than the capped limit. Also, the ISA doesn’t accrue interest.
Advantages For Income Share Agreements For Schools And Programs
Institutions Get Increased Accessibility
Bootcamps, universities, and colleges use ISAs to boost their accessibility to students. Typically, institutions that use ISAs help students who can’t fund their education or might have exhausted their federal student aids.
The ISAs also help students who can’t access federal financial aid, particularly those enrolling in alternative education such as coding boot camps.
As you probably know, if you’re interested in alternative skill-training programs, you can’t access federal financial aid. And that’s because these programs don’t qualify for Title IV funding.
Schools Get Increased Enrollment
This point sort of links to the point above. Colleges and universities need more people enrolling in their programs, and ISAs are one effective way to do it. ISAs have proven to work, and that’s why 4-year colleges can boost enrollment.
Schools can provide alternative funding options to students who may not prefer private student loans with an ISA.
Aligned Risk Between Students And Institutions
With private student loans, students mostly take all the risks that come with student debt. However, with ISAs, various schools can confidently claim that their programs will surely land you a good job or gain enough skills to find suitable positions.
It adds to the school’s reputation and shows how they’re willing to share risks, including the rewards with their students.
Advantages Of ISAs For Students
Deferred College Tuition
ISA contracts vary. However, most of the agreements allow you to go through your course without worrying about monthly payments. Instead, you start your monthly payments when your income starts coming in after graduation.
This term helps you focus on your studies and acquire the education you need. That way, you won’t have to worry about saving up large sums of money before the semester begins.
Usually, when you use ISA to fund your education, you won’t owe the school or company anything until you start earning over a certain amount.
The ISA Gives You Benefits
Unlike the private student loan, you won’t need to worry about fixed payments for ISAs. And that’s because the ISA links to your pre-tax income per month by a percentage. So if you earn less than the minimum income threshold, you won’t need to make monthly payments.
As explained above, the benefits of the ISA are there to help students pay back their debts and remove any compounding interest.
ISA Reduces Risks For Students
ISAs can offset risks because the programs can secure students from paying for educational experiences that won’t benefit them, especially in the job market. ISAs help produce students better suited for the job world by balancing the risks linked with educational funding.
It’s possible that in the future, ISAs can help change how education provides and maintain the relevancy of their curriculum by being up-to-date with the current workforce. That way, students can enter the job world and perform well.
Should You Opt For An Income Share Agreement?
The answer depends on your terms, but you should keep the following in mind. First, ISAs are best suited for covering small funding gaps in certain situations. So you should consider an ISA if you’re an undergraduate who has exhausted their grants and scholarships, including federal student loans.
You should also consider an ISA if you can’t get a private student loan with lower payments compared with an ISA. If you can get a private student loan with a better rate than an ISA, go for it. You can do that with a co-signer if you don’t have a good credit score.
Before you consider income share agreements, you need to watch out for a few things. First, consider the eligibility of the ISA program. And that’s because several ISAs limit who qualifies. For example, some ISA may limit those eligible to certain states, so always do your background check. Secondly, consider the repayment cap.
How much money can you handle? Make sure you do the necessary calculations with different salary scenarios. Then, you compare the ISA’s overall cost to other financing options. Also, take time to find an ISA with a low repayment cap.
Thirdly, know the minimum salary threshold before you proceed. The threshold is usually between $20,000-$30,000 per year. Furthermore, some Income Share Agreements may require that you come with specific requirements that you’ll need to follow through when it’s time to find a job. So make sure you know what they are and if they are okay with you.