Income Sharing Agreements: Are They Better Than Student Loans?

As many people suffer under the weight of student loans, there are schools out there trying to come up with a better solution for the absurd costs of higher education.

One solution, known as income-sharing agreements (ISAs), is a growing alternative to student loans that have schools and investors alike “betting” on the future income of college students.

Essentially:

Students give up a percentage of their future income in exchange for education funding right now.

The question is:

Are these ISAs arrangements actually better than student loans?

Learn how they work to see if you should consider an income-sharing agreement to pay for college.

What is an Income-Sharing Agreement?

An income-sharing agreement (ISA) is a contract between a student and their school where students must pledge a percentage of their future earnings for a fixed period of time.

With ISAs, there is no interest rate.

Since the payments are based on income, the idea is that they remain affordable for the life of the agreement.

Many like the model because it incentivizes schools to be financially vested in students’ success. Repayment is based on whether or not a student’s education helped them enter into gainful employment.

Most often, ISAs are funded by a combination of investors, certain organization, and/or the learning institutions themselves.

The goal of ISAs is to give more students access to education who might need more financial support for their schooling.

Where are ISAs available?

Currently, only a limited number of higher education institutions offer ISA. Some coding boot camps are using the model, too.

For higher education, the ISA offering may also be limited to certain majors like engineering, computer science or education, for example.

Other institutions are piloting the program and making it accessible to a smaller group of students before rolling out the program on a larger scale.

How does an ISA work?

An ISA has some main contract terms that make up the essence of the funding agreement.

These key contract elements can help students understand the terms of the agreement so as to compare it with other funding options:

  • ISA amount- The amount of money credited to the student’s account
  • Income share - The percentage of future income a student agrees to pay after leaving school
  • Minimum income threshold - Minimum income threshold a to begin paying back the ISA
  • Payment term - The maximum number of monthly payments to satisfy the ISA terms.
  • Payment cap - The maximum amount of ISA payments a student will pay. For example, it could be 1x or 2x the original loan amount.

When to Consider an ISA to Fund College Education

An ISA is worth your consideration if you’ve run out of funding options to pay for your higher education expenses.

Perhaps you’ve maxed out on financial aid or have depleted your personal funds to pay for your education.

However:

Even if you’ve ruled out all your other funding options, you must still meet other requirements to participate in an ISA.

As mentioned, the number of educational institutions offering ISAs is limited while you must also meet requirements in terms of major, GPA and other criteria set forth by the individual schools offering ISAs.

So if you are enrolled in a qualifying institution while meeting additional criteria, then an ISA might be an option to explore.

Review ISA terms carefully

You’ll also want to look at the terms of the ISA to make sure you are comfortable with the percentage of income you’ll be pledging once you land a job.

If you expect to be a high-wage earner, you should weigh your potential payments against the student loan repayment option.

So:

Compare your payment cap with the total amount you’d repay with a federal or provide a student loan.

Depending on your situation and income prospects it may or may not make sense to choose an ISA over a student loan.

Pros and Cons of Income Sharing Agreements

Pros Cons
  • No interest rate
  • There’s a cap on the amount that you will have to pay back
  • The payment period is defined and limited
  • Payments pause when you make less than the minimum income threshold
  • Can be used in conjunction with other forms of financial aid
  • Payments are a set percentage of your income which can be more expensive for higher-wage earners
  • ISAs are offered on a limited basis through a small number of learning institutions
  • ISAs may only be offered to people in specific majors or who meet other certain criteria

Are ISAs Better Than Student Loans?

ISAs share some similarities with student loans in that they are a contractual agreement to repay money based on terms set forth by the funder.

Like student loans, ISAs also have provisions that pause payments if a borrower’s income is below a certain amount.  

With an ISA, this would be the minimum income threshold.

For student loans, you have the option to defer your loans or put them in forbearance during hardship or inability to pay on the loan.

ISAs are different from student loans in that the terms of the contract put more limitations on when and how the loan is repaid.

Unlike student loans, ISAs do not have an interest rate and there is a defined limit on the amount you’ll repay.

Finally, ISAs are different from student loans in that they are not universally available to every student.

If you don't attend an institution that offers them or meet all the criteria to participate in the ISA, you cannot use an ISA. Federal student loans, however, are generally available to anyone enrolled a higher education institution.

Now:

You don’t always have to choose between an ISA and a student loan or financial aid packages.

If, after you’ve explored all your funding options and still need more money, an ISA can be added to your educational funding options in some cases.

Alternatives to ISAs

If you don't qualify for an ISA to fund your education or don’t think this arrangement is ideal for you, you still have plenty of options to fund your studies.

Work for a higher education institution

Many universities and college offer free or reduced tuition if you work for them in some capacity.

Each institution has its own rules regarding tuition waivers and discounts, so make sure you know which positions offer tuition discounts as part of their employment packages.

Here are some examples of positions that may offer tuition waivers and discounts:

  • Resident advisor (RA)
  • Teaching assistant (TA)
  • Other full-time or part-time personnel

Consider tuition-free institutions

In the U.S., there are a number of tuition-free schools. You may have to meet some criteria to gain entrance but the qualifications are not as stringent as you think.

For example, you may have to commit to working a minimum number of hours each week or live in a specific region to qualify.

Then, there are a number of countries that offer free education to not only its own citizens but also to internationals.

For example, you can study for free in Germany, Norway or Luxembourg without paying for tuition. Then, there are also a number of countries that offer extremely low-cost tuition to both its own citizens and foreign students as well.

You may have some expenses that include fees and housing but your tuition is either free or low-cost.

Before enrolling, you’d want to check if your degree would be recognized here in the U.S. or any country where you expect to be employed.

Join the armed forces

If you don’t mind committing to serving in a branch of the U.S. armed forces, you could be eligible for tuition assistance.

Tuition assistance programs and terms could vary based on the branch of service you enlist in but it’s worth considering if you’d like to receive some or all of your college expenses covered.

Scholarships

There are thousands of scholarships available to students in varying situations.

Truly:

There are scholarship offering for some of the most bizarre things.

For example, there are scholarships for left-handed people or even musicians who also desire to attend flight school.

It takes time and diligence to research and apply for scholarships but it can give a big boost to your college funding efforts.

Consider community college

Another way to defray college costs would be to enroll in community college.

The price per credit hour is typically much less than a university or college would charge.

You can take your less expensive credit hours and transfer them to the higher education institution of your choice when you are ready to graduate with your degree.

In the meantime, you will have saved tens of thousands of dollars versus paying for more expensive credits at a university or college.

Bottom line

Figuring out how to pay for college can be a huge task but the good news is that the options are expanding.

ISAs may or may not work for your higher education needs but you always can start researching additional funding possibilities that could work -- rather than relying solely on financial aid and student loans.

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