What Is An Income Share Agreement?
The income share agreement is a new way to finance education. The funds are given by committing a percentage of your future income for a fixed period. An ISA agreement has become one today’s most exciting innovations to help finance a college education. The student can pay more or less of the amount that’s received as per the agreement terms.
The income share agreement is mostly run by colleges to assist their students. Schools occasionally will use private capital sources. A few private lenders also offer income share agreements. Keep reading to learn more about this alternative way of financing and how you can get it.
How Income Share Agreements Affect You
If you’re looking for an alternative to borrowing a student loan then choose an income share agreement. ISA student loans are presented differently than traditional student loans. An added advantage of an ISA loan is that it has no interest.
The terms of the income share agreement vary from school to school. The annual percentage rate of an income share agreement depends on the amount of loan you have borrowed, the duration of the loan taken, and the payment cap.
Some income share agreements colleges will offer you a loan of up to 15% of your projected salary. With this, you’ll also have to take out a student loan to cover the balance cost. Thus, you’ll not only have an income share agreement to pay but a student loan to pay as well. This can be due to the average cost of one year of college, which can range from $20,770 for public schools to $46,950 at private universities.
Let’s say the average annual cost for a degree is $10,000. Accordingly, you’ll borrow a total of $40,000 till you graduate. You agreed to pay a rate of 5% on your income for the agreed term, say 10 years. Assuming you earn $30,000 per annum after graduation, you’ll pay $1,500 for every $10,000 you borrowed, which amounts to $6,000 a year. By the end of the ten-year term, you’ll have paid $60,000 from your income.
Long-Term Effects
Many income share agreement schools won’t charge their alumni to pay their income share agreement loan unless they’re making a decent salary. So why would a college grad hunt for a high-income job if a good amount of their salary will go towards paying back their income share agreement? Given the correlation to your income, an ISA is a type of gamble that can either benefit you or pile on the unwanted debt.
Consider the above example where you borrowed a total of $40,000 over four years and agreed to repay by sharing 5% of your annual income for 10 years. Without considering any increase in salary, you’ll end up paying $60,000. The impact doesn’t end here. As your income increases, the share also grows.
Let’s say you start earning $35,000 per year after five years. Now, you’ll be paying $1,750 (5% of $35,000) for every $10,000 you borrowed, amounting to $7,000 per year. So, you paid $30,000 from your first five-year income and $35,000 from your second. That’s $25,000 more than you borrowed. Just imagine how much the amount can add up to if you’re on the receiving end of frequent raises.
An income share agreement works the same as a private loan but has a different approach to student loan debt. With an income share agreement, there’s no incentive to pay back more than what you owe, until you get out of the debt as soon as possible.
Other Ways To Fund Your College Education
A financially struggling student might think college isn’t worth the endless debt. The good news is that a student doesn't need to opt for a student loan or debt of any type. Students can try to fund the costs using your scholarships and grants. They can also check out in-state schools or try going to a junior or community college for the first two years of your degree.
If you’re a parent, using an education savings account (ESA) will help start saving for your children's education. An ESA saves $2,000 after tax per year per student, and this goes tax-free.
Make sure you’re applying for scholarships and grants as these are free and can help cover the costs. Get a job and plan your budget. Save a portion of your income and use it to cover the expenses. Most of all, consider all options and compare loans.
Who Is It For?
Every college major will decide the ISA payback rates and years. Majors that have lower starting salaries will have higher payback rates and longer terms.
Most majors from STEM fields (science, technology, engineering, mathematics) have higher starting salaries. They have better payback terms with 3% for eight years. This option can easily work out better than a student loan. Therefore, the ISA option is better suited for students pursuing a professional degree in high-paying courses.
Bottom Line
Income share agreements aren’t made for everyone. Research the terms offered by the ISA program. The lower the income share rate and terms, the better the deal. To compare, check the total payback amount against student loans. Unlike student loans, ISA won’t offer the same advantages such as forbearance, hardship deferments, and income-based repayment plans.
