What Is an Income Share Agreement (ISA)?

ISAs are becoming a hot topic as more people search for alternatives to traditional student loans. Understanding the nuances of income-share agreements matters because they can affect your financial future. In this article, we cover essential questions about ISAs, including payment structures and potential risks.

Key takeaways

• Income-share agreements offer an alternative to traditional student loans with repayments based on future income, rather than a particular interest rate on the principal balance
• Key features of ISAs include income-share rate, salary floor, payment cap, and repayment term
• Racial disparities have been observed in ISAs, necessitating careful scrutiny of terms by minority students

What is an income share agreement (ISA)?

An Income Share Agreement (ISA) is a college financing option. In an ISA, you repay a percentage of your future income instead of a loan. This method aligns your educational investment with your career success.

How do you apply for an income share agreement?

Applying for an ISA typically involves several steps. First, find out if your school or career program offers ISAs. ISAs are seen most commonly at vocational schools and boot camps; while some traditional universities offer ISA programs, it's not as common.

Purdue University's "Back a Boiler" program is one example. Certain private financiers like Stride Funding also offer ISAs.

Second, gather your necessary documents, like proof of enrollment and identification. The ISA provider will let you know what documents they will need. Note that we do not call them “lenders”, as an ISA isn't technically a loan, according to law.

Required documentation and eligibility criteria

You generally need to provide information about your field of study, projected graduation date, and sometimes your estimated future earnings. ISAs don’t require a cosigner, a credit check, or even a high credit score.

This makes them accessible to a broad range of students, especially those who may have exhausted other financing options. However, that does mean that the implied interest rate from the ISA may be much higher than a traditional loan.

What makes a good income share agreement?

A favorable ISA usually has clear, student-friendly terms. Look for ISAs with an income-share rate below 10%, a salary floor that matches your expected entry-level salary, and a payment cap of fewer than two times the borrowed amount. If you make below the salary floor, you do not have to make payments during that time, aligning incentives between you and your ISA counterparty.

Understanding the repayment terms

Repayment terms should align with your career prospects. For example, Stride Funding has a salary floor of around $30-40K depending on your specific agreement, meaning you’ll only start repaying once you hit that annual income. Another crucial element is the repayment term duration, which typically ranges from two to ten years.

Concerns about racial disparities in ISAs

ISA programs have faced criticism for potential racial disparities. A study by the Student Borrower Protection Center found that Stride Funding's ISAs charged higher rates to students from historically Black colleges. For instance, a computer science major at Tuskegee University was quoted $2,802 higher for a $10,000 ISA compared to a peer at Auburn University.

TuitionHero Tip

This data highlights the fact that although ISAs can be a tool to expand access to education funding, some ISA providers might still unfairly discriminate against certain students.

Effect of discrimination on repayment rates

Discrimination based on race, gender, or field of study can skew repayment rates. This is crucial to consider if you're a student from a minority background attending a minority-serving institution. Carefully comparing terms between different ISA providers and ensuring that you’ve received an equitable ISA financing offer can help mitigate this risk.

The history and future of ISAs

The concept of ISAs dates back to a 1955 essay by economist Milton Friedman. He proposed financing education similarly to how investors provide capital to businesses - with the expectation of a return based on future profits. By 2019, over $250 million worth of ISAs had been originated.

Evolution and the current landscape

Currently, ISAs are available through a limited number of universities, coding bootcamps, and other career schools. Given the rising student loan debt (which is currently at an all-time high), ISAs provide a compelling, albeit niche, alternative. Experts like Tonio DeSorrento from Vemo Education estimate that around 50 colleges currently offer ISAs.

What pitfalls should you watch out for?

The market for ISAs is largely unregulated, since it isn't a traditional loan product. This can lead to practices that may be detrimental to students. Some ISA providers might use harsh collection methods, charge excessive fees, or even set off the debt against your state tax refund if you default.

Checklist for avoiding pitfalls

To avoid these risks, read the fine print carefully. Make sure the terms regarding repayment caps, income-share rates, and salary floors are clearly defined and reasonable.

Always compare ISAs with traditional loans and other financial aid, like federal student loans or private loans. For more insights on optimizing your college financing, visit our detailed guide on selecting the right student loan refinancing options.

Data table

The table below summarizes key data points and features of ISAs. This quick reference can help you understand the crucial aspects of ISAs at a glance.

Dos and don'ts of income share agreements (ISAs)

When considering an Income Share Agreement (ISA) for your education financing, it's crucial to understand the key features and potential pitfalls. Below, we've outlined essential dos and don'ts to help you make an informed decision and secure the best financial future.

Advantages and disadvantages of income share agreements (ISAs)

Explore the benefits and drawbacks of Income Share Agreements (ISAs) versus traditional student loans. This guide provides a concise comparison to help you determine the best financing option for your education, focusing on key aspects like repayment terms and accessibility.

Advantages of income share agreements (ISAs)

• Repay based on income: Payments are tied to a percentage of future income, potentially easing the burden if earnings are low.
• No credit requirements: ISAs do not require a credit check, making them accessible to students without strong credit histories.
• No payments under salary floor: If you earn below a certain amount, you don't have to make payments.
• No cosigner needed: Students can secure ISAs without a cosigner, unlike many traditional loans.
• Flexible repayment term: ISAs generally have a fixed term, and payments stop after the term ends, regardless of the amount paid.

Disadvantages of income share agreements (ISAs)

• Potential high cost: The implied interest rate can be higher than traditional loans, especially for high earners.
• Racial disparities: There have been concerns about discriminatory practices in setting terms for different demographics.
• Lack of regulation: ISAs are not as regulated as traditional loans, potentially leading to less favorable terms for borrowers.
• Repayment uncertainty: The total repayment amount can be unpredictable, as it depends on future income.
• Limited availability: ISAs are not widely available at all institutions, restricting access for many students.

Why trust TuitionHero

At TuitionHero, we help students and parents explore all financial aid options. We provide resources and connect you with lenders for private student loans, refinancing, and scholarships. Our tools simplify navigating FAFSA and finding student-friendly credit card offers. Visit our site to make the best financial choices for your education.

Frequently asked questions (FAQ)

How does the repayment cap work in an ISA?

The repayment cap in an ISA sets a maximum limit on the total amount you'll repay. This cap is typically a multiple of the borrowed amount, and it’s usually recommended to avoid ISAs that go above 2x the loan amount.

Always read the terms of your agreement carefully to understand the full implications. Learn more about different student loan options to compare with ISAs.

Are ISAs available for graduate students?

While ISAs are more commonly found at the undergraduate level, some graduate programs do offer them. As ISAs' popularity grows, schools and private lenders might increasingly extend these agreements to graduate students. For alternative funding options, particularly suited for graduate students, check out our graduate student loans guide.

What happens if I move abroad after graduation?

Most ISAs stipulate that repayments continue regardless of where you live, but the specifics can vary by provider. Make sure to review the terms of your ISA regarding international income and any necessary arrangements for payment. If international plans are a possibility, consider reviewing how these terms will affect your obligations.

Can I refinance my ISA?

Unlike traditional loans, ISAs typically don’t offer refinancing options because repayment depends on future earnings, and not a loan balance with interest. However, understanding your ISA terms clearly before committing can prevent future complications. For refinancing information specific to traditional student loans, see our resources on refinancing student loans.

Do ISA terms vary based on the field of study?

Yes, ISA terms usually vary depending on your chosen field of study. For instance, students in higher-earning fields like engineering might get better terms compared to those in lower-earning fields.

This variation aims to align repayment with expected income. Explore more about choosing the best financial aid options based on your needs.

Final thoughts

Income share agreements can be a valuable tool for financing your education, offering flexibility, and aligning costs with your future success. However, understanding their nuances and potential pitfalls is crucial.

We recommend carefully comparing ISAs with other financing options, like private student loans, to make an informed decision. Whether pursuing an ISA or another route, ensuring that you fully understand the terms will help you secure the best financial future.

Source

• Stride Funding review
• Stride Funding Action
• Number of ISAs Done What Income Share Agreements Are, and How They Work - NerdWallet
• Income Share Agreements: What Are They, and How Do They Work?