Wouldn’t it be nice if student loan payments were matched to your income so that you only pay what you can afford?
That’s the idea behind income-share agreements (ISA). In exchange for an agreed-upon percentage of your future salary, an ISA funds a significant portion of your tuition.
But as you might have guessed, there are reasons why ISAs have yet to supplant student loans as the funding option of choice for most students, despite being conceived over 50 years ago. Read on to learn more about ISAs and when they might be an appropriate option.
What is an income-share agreement?
An income-share agreement is when a company or university agrees to pay a certain amount of your college tuition in exchange for a percentage of your future income. It’s essentially a loan that is structured differently than the more traditional options. You can think of it as a permanent income-based repayment plan.
The percentage of income charged depends on the ISA provider, typically ranging between 2% and 10%. Students with higher projected earnings will usually be offered lower percentages.
Income-share terms usually range between two and 10 years, depending on the provider. Some ISAs cap the amount repaid at twice the amount borrowed, and many ISAs offer a six-month grace period after graduation, similar to other student loans. There is no forgiveness option with ISAs, unlike federal loans.
Many ISAs also have an income threshold. If your salary is below that threshold, you won’t owe anything. Likewise, you won’t owe any payments if you’re unemployed or working part-time. These months may still count toward your term, but it depends on the specific ISA. Some ISAs will only count the months where payments are made, while others will include the months where your income is below the threshold.
Who uses ISAs for income-based student loan repayment
Students use ISAs in lieu of private student loans or if their parents don’t qualify for a Parent PLUS loan. Most ISAs require that students max out their federal student loans first before becoming eligible.
Most universities and ISA companies require that the student meet a projected income level or major in a certain field, like engineering or computer science. This often excludes students in lesser-paying specialties, like social work or education.
Situations where income-share agreements are more appealing than student loans
If you have student loans and become disabled, you can petition in court to have the loans permanently discharged. You’ll need to prove that you can’t work and will be unable to work for the foreseeable future. This is a notoriously difficult and time-consuming process.
In this case, an ISA may be more flexible than a private student loan. If you become disabled, you would most likely be under the minimum income threshold and not be required to make payments.
ISAs do not require cosigners like most private student loans do, so students don’t have to ask their parents to be financially liable for a loan.
The downsides of income-share agreements
While some have heralded ISAs as a low-cost alternative to student loans, experts are quick to point out that students can end up repaying much more than if they had taken out traditional student loans. While private loans can start at higher interest rates, students can refinance them later to get a lower rate.
But with an ISA, there’s no way to extricate yourself from it or to reduce the percentage or term. The terms of an ISA are final, and the only way to get out of an ISA early is through bankruptcy. That’s because an ISA technically isn’t a loan, but a contract between you and the university or third-party provider.
If you take out a private student loan, you can always refinance the loan for a lower interest rate or a longer term if you want to reduce your monthly payment. The terms of an ISA are permanent.
Along those same lines, borrowers are also unable to repay ISAs early, while private student loans allow prepayment with no prepayment penalties. An ISA might appeal in year one but feel like a burden you can’t escape in year five.
Another drawback is that ISAs are ineligible for any employer-based student loan reimbursement, as these programs are only available with federal and private student loans.
How private and university-based ISAs differ
Students interested in ISAs can either apply to their school’s ISA program, if it has one, or use a third-party company like Stride or Leif.
Currently, ISAs are more common with smaller colleges than major universities. Purdue University and the University of Utah are two of the largest universities offering ISAs.
Purdue’s Back a Boiler program sets its terms based on the particular major and projected income. Those with higher projected salaries will owe a smaller percentage of their future income than those with lower projected salaries.
Will you save money with an income-share agreement?
ISA providers claim that students will save money if they choose an ISA instead of a private student loan. Here’s how it actually plays out. Let’s say you attend Purdue University, which offers an ISA.
You receive $10,000 in ISA funding and agree to pay 2.95% of your income for about seven years. After you graduate, you get a job making $60,000 a year. When the term is completed, you’ll have repaid a total of $16,065.
However, if you took out a $10,000 private student loan at 5% interest and a 10-year term, you’d pay $14,849 total. That’s a difference of $1,216. Many student loan companies offer even lower interest rates if you refinance. This example shows why choosing a private student loan may be less expensive in the long run than an ISA.
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