Income Share Agreements (ISA) have emerged as an alternative to traditional private student loans. Under an ISA contract, you are also provided with a deferred tuition option to cover costs in exchange for a promise to pay a percentage of your income after you’ve graduated.
Besides the absence of growing interest and generally, no upfront payments, a significant benefit of an Income Share Agreement is the fact that there are certain instances when your payments are paused or deferred.
This Guide will walk you through all the details of Income Share Agreements, including an explanation of what they are, how they work, and how to get started offering your own Income Share Agreement at your program or determine if an ISA is right for you as a student.
After reading this post, if you have any other questions about Income Share Agreements, check out our ISA page. If you’re interested in offering an Income Share Agreement at your program click here to schedule a meeting with one of our ISA specialists.
An Income Share Agreement can be summed up as:
An ISA, or Income Share Agreement, is an agreement between a student and a school where in exchange for covering the cost of that student’s tuition, the student agrees to pay back a portion of their income after graduation for a set amount of time as long as they are earning an agreed-upon yearly income.
In an ISA contract, let’s say, for example, you were to go to a four year college as an economics major you might promise 10% of your monthly income for 24 months (24 monthly payments) in exchange for $10,000 (the cost of your tuition). The cap on your total payment would be 2 times the amount received and the minimum income threshold (how much you have to be making before you begin paying back) is $20,000
Let’s compare three scenarios: one with the average starting, pre-tax salary of an economics graduate, $50,000, one with higher pay, perhaps at an analytics or investment firm, $80,000, and one with lower pay, say at a Starbucks, $17,000.
In the first scenario, you’ll end up paying $416 monthly or $10,000 over the 24 months. In the second you pay 16,000. In the third scenario, you’ll pay nothing until your earnings climb above $20,000, but as long as you work full-time, your payment clock keeps ticking. If your earnings stay below $20,000 for the 24 months your obligation will end with no payments.
Of course, the above examples are if your earned pre-tax income stayed stagnant for the entire 24 months. If your income was cut in half or doubled your payments would be cut in half or doubled. But because the capped amount is 2 times the 10,000, the second you paid back 20,000, your payments would stop.
Although there are other protections included with student loans, generally you can’t get this specific kind of protection with a traditional private student loan. With traditional private student loan payments, whether you’re the Barista at Starbucks or the analytics specialist, you pay the same flat amount plus interest.
Income Share Agreement Key Terms
Since Income Share Agreements are a less common way of financing education there are some terms that differ from traditional private student loans that many are not familiar with. There are a variety of different factors that make up the structure of an ISA program, but here are some of the key terms to know. Here’s the full glossary of terms if needed.
Income Share Percentage – This is the fixed percentage of your future monthly pre-tax income that you agree to share during your contract term. Income shares can range from 2.5% to as high as 17.5%
Monthly Payment – This is what you pay back on a monthly basis after you’ve graduated during the term of your ISA contract. To put some numbers to this, if your Income Share is 5%, and you’re earning $60,000 per year (or $5,000/month), your Monthly Payment would be $250/month.
The Minimum Income Threshold – The Minimum Income Threshold (or the Income Floor) is a minimum income below which students don’t have to make payments. These typically range from $20,000 to $50,000 but sometimes more depending on the industry and program. In addition to protecting students who are earning less, this once again incentivizes a school to align risk with their students. It’s their way of not only promoting the future income you could earn when going through their program, in some cases, it guarantees it.
Payment Cap or “Ceiling” – Your payments are capped at an agreed-upon amount, so you are not punished for making a higher net income. This provides some protection to students who are extraordinarily successful from making unreasonably large payments. Generally, these caps range from 1.5x – 2x the tuition amount.
Payment Window – This is how long your ISA contract lasts. The window typically ranges from two years to 10 years. Some ISAs will count months in which you earn less than the salary floor toward your repayment term. Others extend your repayment term in these instances.
Required Payments – By far the most common way for one to satisfy their ISA. With an ISA, you pay back a fixed percentage of your earnings each month for a set number of months. Each of these payments is considered one of your Required Payments.
Automatic Deferment – During periods of involuntary unemployment from sickness or other unforeseen circumstances, or if your total future income drops under a certain amount (the Minimum Income Threshold), your payment obligation will be automatically waived without penalty. Unlike traditional private student loans, where you must apply for a temporary deferment period, with an ISA agreement, your payments will be suspended automatically during periods of economic hardship. Think of it like having an insurance policy protecting your traditional private student loans.
The important thing to remember is that ISAs don’t all offer the same sorts of flexibility, or value, because there can be huge variances in long-term costs, so you’ll certainly want to compare different offers against each other before agreeing to any of those that you receive.
How To Satisfy Your Income Share Agreement
By far the biggest differentiating factor between ISAs and a traditional private student loan, other than the protections built-in, is the way they’re satisfied. With an ISA contract, there are three distinct ways you can finish your ISA program:
1. Make the Required Number of Payments
With an ISA, you pay back a percentage of their future income each month for a set number of months. Each of these payments is considered one of your Required Payments. If you pay all the Required Payments, your ISA amount is satisfied!
2. Pay the Max Payment Cap
The Max Payment Cap is built into your ISA and is the most you’ll ever need to pay towards your ISA. It is a built-in protection for high earners so that they are not punished for earning more than expected. A Payment Cap is usually some amount more than the Funded Amount (the amount the school is fronting you for their program as part of your ISA). Once you hit your Max Payment Cap, your ISA is also satisfied!
3. Reaching the End of the Payment Window
The final way to end an ISA is by reaching the end of the Payment Window. The school or lender with who you have an ISA with will have a set time period to collect your Required Payments or Max Payment Cap. However, if you have not reached either of those two and the Payment Window ends, you’re absolved of your ISA.
To read a more in-depth version of how to finish your ISA payments click here!
Income Share Agreements VS. Traditional Private Student Loans
Traditional Private Student Loans
With traditional private student loans, you’re obligated to make your payments whether you have a good-paying job or not. A bill comes in each month and if you can’t pay, your options are limited. Traditional private student loans also accrue interest over time meaning that your payments will increase as time goes on.
Income Share Agreement
If you are unable to get a job after graduating, with an ISA obligation, you’re given flexibility with your payments. If you’re making less than what you and your school agreed upon (called the Minimum Income Threshold) or are unemployed, your payments are paused. You don’t have to make payments until you’ve found a job making above that income threshold. Students enrolled in an ISA will only pay back money if they are earning over a certain amount, and those who are very successful will never pay back more than a capped limit. Income Share Agreements also do not accrue interest.
For more ways an Income Share Agreement and a Traditional Private Student loan differ check out this blog post.
What Schools and Programs Offer Income Share Agreements?
All sorts of schools are beginning to offer ISAs, including traditional 4 year colleges and universities, online-only educational institutions, and a variety of bootcamps and career training programs.
Here’s a quick (but not exhaustive) list of schools and programs that offer ISAs
- Lambda School
- Purdue University
- Colorado Mountain College
- Allan Hancock College
- Lackawanna College
- Clarkson University
- Norwich University
- Messiah College
- University of Utah
- Make School
The Benefits of An Income Share Agreement For Programs and Schools
1. Increased accessibility for students
Colleges, Universities, and bootcamps alike are using ISAs to add more options to increase accessibility for students. Institutions implementing ISAs typically use them to fill funding gaps for students who have exhausted their federal financial aid options, or who may be debt averse.
Income Share Agreements also assist those who cannot access federal financial aid, especially anyone attending alternative education, like coding bootcamps. Students interested in bootcamps or alternative skill-training programs can’t access federal financial aid since these programs are currently ineligible for Title IV funding.
2. Increased Enrollment
Related to point number one, another advantage of offering an ISA as one of your financing options is that it fills empty seats that a school might otherwise not be able to fill through traditional educational financing. Because Income Share Agreements increase accessibility to students, 4-year colleges are able to increase enrollment and fill empty seats. With an Income Share Agreement, schools can offer an alternative financing option to those who may be hesitant to take out a traditional private student loan.
3. Aligned Risk Between Schools and Students
With many traditional private student loans, the student takes on almost all the risk of the debt. With an ISA schools are able to confidently signal to students that the skills the student will learn through their program will allow them to find a job in their field, or gain enough skills to find another suitable position. This also adds to the school’s credibility and shows they are willing to share the risks and rewards with the student.
The Benefits For Students
1. Deferred Tuition
Although ISA contract terms vary, most Income Share Agreements allow you to go through the program without worrying about paying for it until you have an income post- graduation. This helps students to focus on school and getting the education they need without having to make payments while studying or needing to have a large amount of money saved up before beginning their first semester. With an ISA you’ll only start making payments after you graduate and once you get a job, and you usually do not owe anything until you earn over a certain amount. This means that you will only pay if your education leads to success in the job market.
2. Consumer Benefits
Unlike with a traditional private student loan, you won’t have a fixed payment hanging over your head with an Income Share Agreement. Because an ISA is linked to your pretax, monthly income by a percentage, if your first job after college earns you less than the minimum income threshold, you won’t have to worry about making payments.
This is because ISAs typically have something called a Minimum Income Threshold that you have to meet before payments start. If your income ever drops below that point, your payments are paused until you are earning above that threshold. Your payments aren’t due if you lose your job, after all you can’t owe a percentage of your income if you have no income. This additional flexibility is a great benefit of Income Share Agreements.
ISAs also have a maximum payment cap which limits your total financial commitment. The max payment cap is the absolute maximum payment you could pay towards your ISA obligation. Your total payments will never exceed this cap and if you do reach the cap on your payments, your ISA obligations are done!
As described above, the consumer benefits included with an Income Share Agreement are there to assist students during their repayment period and help to remove compounding interest that seems to never disappear.
3. Off-sets Risk for Students
ISAs off set risks for students because they have the potential to protect students from paying for educational experiences that don’t create value for them in the labor market. Income Share Agreements help to shift some of the risk of poor workforce outcomes away from students, and to produce better outcomes by helping to balance out the risks associated with educational financing. In the future, ISAs can potentially help change how education providers keep their curriculum relevant and up to date with the current workforce, so students can enter the workforce effectively.
Click here to read more about the benefits of ISAs for students.
Scholarly Articles and Content on ISAs
Looking for further information on Income Share Agreements? Below is a list of scholarly content and additional resources for further information.
Federal Reserve Bank of Philadelphia, Discussion Paper on ISAs
The Future of Income-Share Agreements, by Sheila Bair and Preston Cooper, published by the Manhattan Institute
Income Share Agreements: How They Work and Their Place in the Federal Regulatory Regime, by Maria Earley, Reed Smith LLP
An Economic Perspective of Income Share Agreements, published by Congressional Research Service
Other Resources for Income Share Agreements
To help illustrate all the best parts of an Income Share Agreement, here’s an story that follows a student’s ISA journey from start to finish.
We’ve put together a list of some of the best ISA podcast episodes to help you learn more about the amazing innovations taking place in higher education today.
What to look for in an ISA product
When it comes to offering your own Income Share Agreement at your program, it can be difficult to know where to start. It’s important to have the right tool to carry out the program. One that can manage and keep track of all of your students as well as their payments. It may seem difficult to know what to look for in a good ISA management tool. We hope that this guide is useful in clarifying what makes a great Income Share Agreement product.
Things to know Before Offering Your Own Income Share Agreement
Advocates say the financing method puts more responsibility on the school to help students succeed, and provides an alternative to traditional private student loans and debt. Before you offer an Income Share Agreement it’s important to take several factors into account, so we’ve compiled a list of things you should do before creating your own ISA program!
Income Share Agreement Calculator
Before you sign an ISA contract it’s a great idea to know exactly how your payments will look for the entirety of the contract. Take a look at this calculator to make sure you know exactly what your payments will be.
Careers for Students
An ISA is a terrific tool to consider as you pursue higher education. Although it can be a wonderful option for many students, it’s not the right path for every student.
While Income Share Agreements sound promising, there are some things to consider. Here’s what you need to know depending on your career path, before deciding on which financial aid route to take.
Hopefully this in-depth guide to Income Share Agreements has helped you understand them better. If you have any more questions don’t hesitate to reach out to us. We’re happy to help!
Meratas provides a full-service SaaS Platform for Schools and Skills-Training Courses to design, administer, and service custom ISA programs. We help institutions create impactful ISA programs designed to promote student accessibility and increase enrollment.
Our programs are intended to incentivize students, schools, and capital providers to work together to promote and finance only the best educational programs that lead to more successful careers.
If you’re interested in offering an ISA option at your school or program that has been proven to increase student enrollment, there’s no better time to offer one then now! Click here to schedule a call with one of our ISA specialists and get your ISA program up and running today.
Are you a student and don’t have an ISA option at your school? Want one? Let us know here so one of our ISA specialists can reach out to your school!
Looking for the best online training programs that offer ISAs for financing? Check out our Student’s page. Meratas is also the number one resource for all things ISA so if you want to learn more, check out our Blog!
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