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The spiraling student debt of $1.6 trillion has become a matter of concern for America. In 2019, around 5.2 million student loan defaults were reported, which further sparked heated debate across the country. Many people wonder if there is a better financial resource to pay for higher education or any escape from the mounting student debt that keeps increasing with each passing year.
The student loan is just like a noose around the neck that keeps getting tighter if the student borrowers fail to pay back their monthly loan payments. What if there is a way out of student loans that allow students to share a percentage of their future income for a particular period to cover their educational costs?
One such method is the Income Share Agreement which can be a reasonable alternative to a lifetime student debt. Let’s understand the difference between Income Share Agreement and Student Loan.
What is an Income Share Agreement (ISA)?
An income Share Agreement or ISA is a contract in which the students get funding for education, and in return, they agree to pay a fixed percentage of their future earnings to the ISA provider for a stipulated time after completing college. ISA provides favorable repayment terms to student borrowers.
The concept of ISA is not novel. Instead, it was introduced as a repayment model back in 1950 by the economist Milton Friedman. However, the Income Share Agreement has become indispensable now because of the rapid increase in student loan defaults in America.
US universities & colleges are earnestly looking for useful ways to facilitate students with their educational expenses. Therefore, the colleges are providing more ISA options to draw a large number of student enrollments.
The whole purpose of building the ISA system was to ensure that each student could pursue their desired degree course without any debt bondage constraining their endeavors.
The Income Share Agreement keeps payments affordable by interlinking repayments to the student employment outcomes. It safeguards college graduates from defaulting when their degree doesn’t help them land a job. Thus, if your educational experience doesn’t pay off, you don’t have to pay.
How does an Income Share Agreement (ISA) Work?
Under the Income Share Agreement, you must start repaying the loan after meeting the income threshold. So, if you lose your job or make less than the agreed amount, you can stop making repayments. Unlike the traditional student loan system that compels students to pay a fixed monthly payment, ISA has flexible repayment terms. The Income Share Agreement provider will determine how much you’ll pay each month based on the ISA terms & your projected salary.
Here are the key elements of an ISA contract
1. Income Share Percentage:
The percentage is not an interest rate but a portion of your gross monthly income which you will pay to the Income Share Agreement provider. As per the State of the Income Share Agreement Market, 2019, colleges have an income share between 2% to 10%. So, if an ISA contract has a 2% income share rate & the student gets an annual salary of $50,000, then his/her monthly payment will be $83 (2%* $50,000 /12 = $83).
2. Payment Cap:
It refers to the maximum amount you will pay under the Income Share Agreement. Hence, the payment cap will protect you from overpaying the ISA provider if you get a high-paying job. The payment cap is fixed and never changes throughout the payment term despite any change in the student’s income. Generally, the payment caps range from 1.5x to 2x the tuition amount.
3. Payment Period:
The ISA contract obligates students to make income-based payments for around 10 years or until they reach the maximum payment cap.
4. Minimum Income Threshold:
To protect students from experiencing any financial distress, each ISA contract provides a minimum income threshold of $30,000. Thus, students don’t have to make repayments until their annual income is lower than the specified amount.
5. Payment Term:
The payment term is the maximum no. of payments you’ll have to make within a fixed payment window. The number & length of payments window may vary as per the institution. Usually, the payment term ranges from 36 to 108 or 120 monthly payments for learning programs, colleges, & universities. The obligation to make payments also ends at the close of a payment window, even if you fail to pay the pre-agreed no. of payments within the payment term.
6. Salary Floor:
The salary floor is the income threshold below which ISA payments are forgiven or deferred. For instance, if an Income Share Agreement has an annual income floor of $30,000, then the ISA payments for a student making less than $30,000/12 = $2500 will be forgiven or deferred.
Pros and Cons of Income Share Agreement
ISA offers an opportunity for students who lack financial means to pursue higher education. But before you opt for ISA, you must be aware of its perks and the downside to make an informed decision. So, let’s look at the pros and cons of Income Share Agreement.
Pros of Income Share Agreement
1. Zero Upfront Fee Required:
The biggest benefit of Income Share Agreement is that it allows students to pursue any degree of their interest without stressing about paying the college fees. So, one can focus more on studies and performance instead of worrying about monthly interest rates.
2. Ease of Accessibility:
Another perk of ISA is that it doesn’t have strict eligibility criteria. In contrast to loans that have many deadlines, there are no difficult terms of enrollment to get financial aid under the ISA contract. Thus, anyone who wants to enroll in a upskill program that supports ISA can do it without much hustle.
3. Does not Overburden Borrowers with Never-Ending Debt:
The traditional student loan system never comes with a repayment cap which means there is no limit to the maximum repayment amount in loans. Students even end up paying double the amount they have taken in the traditional loan methods. In the ISA, there is always a maximum payment cap that limits your total financial liability.
4. Higher Flexibility:
It is not so easy to renegotiate or restructure student loans. So, student borrowers who don’t get much professional success in life may end up getting buried deep under hefty debts, which is less likely to happen under an Income Share Agreement, as people who don’t earn much after graduation are never asked to repay and may even get a payment forgiven option.
Cons of Income Share Agreement
1. ISA is Unregulated:
Federal loans and Private Student Loans are regulated in a proper way, but ISA is a relatively new concept that doesn’t have any defined rules about how to operate. Hence, some income share agreement companies use it to their advantage and offer low-value ISAs or programs that may seem cheap but end up being more expensive than student loans.
2. Less into Practice:
At present, only a handful of US universities have accepted the Income Share Agreement program, while the traditional loans are still going strong in terms of usage & being a more reliable financial resource for students. However, the popularity of ISA is likely to grow in the future, considering the state of the student debt crisis.
3. ISA does not have the Same Level of Protection as the Federal Loan:
Federal loans give many protection options to the student borrowers, such as low-income consideration, public service forgiveness, & others that aren’t available in the ISA program.
4. Not Getting Placements:
Sometimes, students struggle to get jobs years after graduation, so they fail to repay ISA. If you want to avoid such a situation, you should look for those Bootcamps and Universities that have been in the business for the long run and have a higher success rate. Check the Candidate Success Outcome and then enroll in a program.
Comparison Between Income Share Agreement and Student Loan
Here is how the Income Share Agreement differs from student loans:
| Terms of Differences | Income Share Agreement | Traditional Student Loan System |
| Flexibility | Students who have signed up for an ISA contract will only pay a fixed amount once they earn above the minimum threshold until they reach the payment cap. So, higher repayment flexibility is given to the borrowers in the ISA contract. | There is less flexibility for repayments in traditional student loans as you have to repay the loan amount along with the added interest regardless of being unemployed or having a low-income job. |
| Safety | Since ISA has the maximum payment cap, it saves student borrowers from making excessive payments. The borrowers have to make the ISA payments until their payment window is over or they have made the total number of required payments. | In private student loans, students are often overburdened by the fixed monthly loan installments and taxes that keep piling up over the years. |
| Time Duration | ISA ends much faster than traditional loans as they follow a 10 years payment term. It means that your obligation to make payments ends after 10 years no matter how much you have paid. | Traditional loans compel student borrowers to make payments for decades until their total loan amount is paid off. |
| Minimum Income Threshold | The biggest difference between an ISA and a student loan is that the former has a minimum income threshold that students need to attain after graduation before making payments. If you lose your job or there is some financial difficulty in making the payments, then you can pause repayments until you get back on track financially. | In private loans, students are obligated to repay the amount side by side while pursuing their education. A bill comes each month, and if you fail to make loan payments for 270 days, your loan will default. |
Conclusion
While both ISA and traditional loans are good financial aid options that help students to pay for college and higher education, one can find plenty of differences among them, like repayment options, borrowing limits, time duration, and much more.
If you seek to explore different job options before jumping into a career, then you should go for an ISA contract that gives more flexibility. The Income Share Agreement empowers borrowers to pause their payments when they are making less than the minimum threshold or during unemployment. ISA frees you from any financial burden until you can repay the borrowed amounts. Thus, ISA can be an excellent alternative to student loans in America.
Many coding bootcamps and some universities have already recognized the potential of ISA to restore the economic condition of the United States. The adoption of ISA can benefit everyone, from students to lenders and the country as a whole. ISA is the future of higher education.
As ISA is correlated to your earnings, you should pursue those courses that will provide higher starting salaries, such as Majors in STEM (Science, Technology, Engineering, & Mathematics). STEM majors have better repayment terms, like 3% for 8 years, which will be more affordable for you to pay.
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