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Pursuing a college degree doesn't come cheap: Total student loan debt reached $1.4 trillion in 2019, according to Experian data. While student loans provide a lifeline for students who might not otherwise be able to afford a college degree, they're not the only option for financing higher education costs.
An income share agreement (ISA) is an alternative way to pay for college that provides funding in exchange for a percentage of your post-graduation income for a set period of time. Forty colleges and coding bootcamps either offer ISA programs or are in the process of developing them, according to a 2019 Career Karma report.
How do ISAs work? And, most important, are they a smart way to pay for college? Understanding the ins and outs of ISAs can help you decide if they're a good fit for you.
How Does an Income Share Agreement Work?
Students who have maxed out or aren't eligible for federal student loans, or want to explore other funding options, may turn to ISAs offered by their school or a private ISA provider to help pay for their education. Unlike student loans, ISAs don't charge interest; instead, students agree to pay a percentage of their future income—typically anywhere from 2% to 10%—for a period of time after they leave college.
Eligibility, funding amount and terms depend on the individual ISA agreement. Your school, field of study and career path will all play a part in the amount funded. For example, Purdue University, one of the first four-year institutions to offer ISAs, will fund a loan as large as 15% of a student's expected annual income.
Predicting how much you'll ultimately repay can be tricky. However, ISAs typically have payment caps that prevent you from paying back more than a certain amount. This is usually in the neighborhood of 1.5 to 2.5 times the total funding received. With Purdue University's ISA, for instance, you won't pay back more than 2.5 times the funded amount, regardless of your income. This means with a 2.5 times repayment cap, you could end up paying back up to $25,000 on a $10,000 loan if you land a high-paying job.
Most ISAs also come with salary floors for repayment, meaning you won't begin paying back your ISA until you're making the minimum income noted in your contract. The coding bootcamp Lambda School, for instance, doesn't require payments until your income reaches at least $50,000.
How Does an ISA Compare to Student Loans?
Every ISA is different because they are determined by individual factors such as projected future income and don't have a set percentage you'll pay back. With federal student loans, however, you'll know exactly the interest rate and payment amounts you'll owe and for how long. Also keep in mind that while federal student loans are tightly regulated by the federal government, ISAs are not. That means you'll need to read contract terms carefully to ensure you don't end up paying more than you expect.
The contract terms are the best place to begin your research. Zero-in on the percentage of your income you'll have to repay for an ISA, along with the projected salary for your intended career path. You'll also want to consider the payment cap: What is the most you'll owe on the amount you receive in an ISA and how does that compare with other funding options?
When comparing ISAs with student loans, you may find that federal student loans are better for your wallet—especially if you're entering a career with high earning potential. The average current interest rate for an undergraduate federal loan is 2.75% (4.3% for graduate loans). Federal loans also come with borrower protections, such as optional loan deferment and the ability to opt in to income-driven repayment plans or loan forgiveness programs.
However, ISAs may be a financially sound alternative to high-interest private loans: The average fixed interest rate for a private student loan is around 10%.
Let's say you need $25,000 in funding to pay for your undergraduate education. Here's how the different financing options may measure up against each other.
|Student Loans vs. Income Share Agreements on $25,000 Loan|
|Funding Option||Terms||Total Amount Paid|
|Federal student loan||2.75% fixed interest rate for 10 years||$28,623|
|Private student loan||10.63% fixed interest rate for 10 years||$40,699|
|Income share agreement|
*Based on a $60,000 salary for two years, then $75,000 salary for the following three years
|5% of your income for five years or 2.5 times the funding amount||$17,250|
|Income share agreement|
*Based on a $100,000 salary for two years, then $125,000 salary for the following three years
|5% of your income for five years or 2.5 times the funding amount||$28,750|
In the example above, high earners would end up spending more with an ISA when compared with federal student loans, especially if they reached the payment cap of $62,500 on the original $25,000 obtained. In some instances, private student loans could cost the most.
When Does an ISA Make Sense?
Your estimated total spend is usually the deciding factor when considering an ISA. Think in terms of your career path. What are the average earnings and what does the typical career trajectory look like? Those studying computer science, engineering or other majors with high earning potential may ultimately spend more with an ISA. However, it could be your best bet if your only other option is a high-interest private student loan.
Students who may later qualify for student loan forgiveness may be better off bypassing ISAs. This includes those who are planning on teaching, working for the government or entering the nonprofit sector. When making the final decision, weigh all your options.
Other Ways to Pay for College
If you're looking to fund your education without traditional student loans or ISAs—or in addition to them—here are some other college financing options to consider:
- Explore scholarships and grants. This is essentially free money that's awarded based on merit or need. Unlike loans or ISAs, grants and scholarships do not need to be repaid. Sites like Fastweb and Scholarships.com are great jumping-off points. Your school's financial aid office can also help you narrow down your search.
- Ask your school for guidance. Your college may be able to point you toward potential fellowships or work-study options that could ease your financial burden. Check to see if they also offer any tuition payment plans. It's a strategy that could create some much-needed flexibility in your budget.
- Consider a part-time gig. Picking up a side hustle or part-time job can help supplement your income and make paying for college a little easier. Look to your school to see if they have any needs on campus that you could fill. You can also look for jobs that are always in demand, like grocery delivery or tutoring. Leverage your skill set and think about ways to offset your college costs.
- Ask family or friends for help. When all else fails, a loved one may be open to lending you money to fund your education. You'll be putting your relationship on the line, so it may be wise to draft a contract to show them you're serious about doing right by them. If they want to support you by giving you a loan, come up with the repayment terms together so that you both feel comfortable with the arrangement.
The Bottom Line
Income share agreements are a unique college financing option that could be a cost-effective strategy for some students. Of course, they're not for everyone—you may end up paying less going with a federal student loan with its low interest rate. Weigh the pros and cons against your career plans to see if an ISA makes sense.