Let’s play Two Truths and a Lie. I’ll go first.
- I have two cats.
- I’m allergic to peppers.
- I graduated college with roughly 80k in student loans.
If your answer was #2 — you’re absolutely correct! Peppers are actually my favorite vegetable (or fruit?).
I’m a self-proclaimed cat lady who unfortunately graduated college with a ton of student debt.
However, the latter wasn’t because I was irresponsible and spent my money recklessly on dumb stuff, but rather because I come from a low-income household. This meant that anything that wasn’t covered by grants or scholarships had to be paid for through debt.
I’m still repaying my loans, and I’ve had to put things on hold, like buying a house or having kids. So, I’m always wondering: is there a better way to pay for college when scholarships and grants are just not enough?
Income share agreements are an intriguing solution.
An income share agreement (ISA) is a financial contract in which you get a certain amount of money upfront to pay for college in exchange for a fixed percentage of your future income.
Just like student loans, the money can be used for tuition and fees, but also to cover other expenses, like room and board.
How do ISAs work?
There are two ways to get an ISA:
- Through your school.
- By applying directly to an ISA provider.
Still, whichever path you choose, the application process will be the same. You’ll have to provide your basic contact information plus the following:
- Your field of study.
- The type of degree you wish to pursue.
- Your GPA (in some cases).
- Your expected graduation date.
- The amount you wish to borrow.
- The date you need the funds by.
After your application is approved, you’ll receive a letter with the details of your ISA. Here, you’ll find:
- The percentage of your income you’ll be expected to pay.
- The different terms available to you (aka the duration of your repayment plan).
- The minimum income threshold for you to start making payments.
Once you sign on the dotted line, your funds are sent to the school and disbursed to you. You’re not required to make any payments until after you graduate and start earning a certain amount.
Pros of getting an ISA
- They don’t accrue interest. Except for Direct Subsidized loans, both federal and private student loans start accruing interest the minute they’re disbursed. In that regard, ISAs have the upper hand, as they don’t accrue any interest while you’re in school.
- Flexible credit requirements. One of the best things about ISAs is that you don’t need a cosigner to get approved for funding. You also don’t need good credit to qualify, which is usually a must for private student loans.
- Short repayment terms. Student loans have a 10- to 20-year repayment term, depending on the loan. ISAs offer shorter repayment terms, ranging between 5 and 10 years.
- They can be cheaper than Direct PLUS and private student loans. Direct PLUS loans (at the time of writing) have a fixed interest rate of 6.28%, while private student loans can have interest rates nearing 12%. With an ISA, you can pay as little as 2% of your income. Here’s a quick example: if you earn 50K a year and have a 2% ISA, your monthly payment will be roughly $83.
- They are capped. ISAs have a limit on how much you’ll have to repay. This varies per program, but the repayment amount is usually limited to one-and-a-half to two times what you originally borrowed.
- Your monthly payment could be as low as $0. If you lose your job or have a low-paying job, your ISA payment could be as low as $0 — something you won’t get with a private student loan.
- You’ll pay a fixed percentage throughout repayment. Once you sign your agreement, that percentage is locked in for life, and can be between 2% and 17% of your future income, depending on your agreement.
Cons of getting an ISA
- Payments are hard to predict. Unless you have a crystal ball, there isn’t a way to know how much you’ll earn in the future. The only way to get an estimate of how much your payments will be is to use a comparison tool. However, these estimates should also be taken with a grain of salt, as the salary data they use may be inaccurate.
- Shorter grace periods. Both federal and private student loans don’t require you to start making any payments until six months after you graduate — the same can’t be said for all ISAs. For example, Lambda School’s ISAs have a one-month grace period, while Stride Funding gives students a three-month grace period.
- More restrictive than student loans. Student loans are available to virtually any student, regardless of their major, as long as they’re enrolled at least half-time and are in good academic standing. But ISAs are often restricted to junior and senior undergrad students, and in some cases, approval will also depend on your GPA.
- Limited funding. With federal Direct PLUS loans and private student loans, you can borrow an amount equal to the full cost of attendance as certified by the school. ISAs, on the other hand, usually are limited to an amount no greater than $25K per academic year, depending on the program.
- They aren’t widely available. Currently, there are fewer than 10 colleges in the U.S. that offer ISAs and only a handful of independent providers, including Stride Funding, Better Future Forward, and Ascent Loans, which offers both traditional private loans and outcomes-based loans (aka ISAs).
- You could end up paying more. Remember I said that you’ll always pay a fixed percentage of your income throughout the duration of your ISA? Well, that can be a double-edged sword. Why? Because if your income goes up, so will your payments.
- They are less regulated. Justin Draeger, president of the National Association of Student Financial Aid Administrators (NASFAA), says that because ISAs are a new concept within the college realm, they aren’t as strictly regulated as student loans. So, there is a lot of uncertainty when it comes to how ISA companies may proceed with late or missed payments, and how bankruptcy courts deal with these agreements.
- Refinancing may not be an option. Federal student loans can be consolidated into one single loan, with a single monthly payment. Private student loans can be both consolidated and refinanced. However, there isn’t a lot of information available on whether ISAs can be refinanced, so this is something to keep in mind.
- You won’t be eligible for forgiveness. With federal student loans, you may qualify for student loan forgiveness after making 120 consecutive payments, if you work at an eligible government agency or a non-profit organization. This isn’t an option if you get an ISA.
ISAs vs student loans, which should you choose?
Borrowing money for school is a very personal decision and one that can have long-lasting consequences.
That’s why Draeger, from NASFAA, recommends exhausting your federal aid options first (Direct Subsidized and Direct Unsubsidized loans), “primarily because of all the protections that are built into the federal student loan programs.”
You should choose an ISA if…
You have maxed out your Direct Subsidized and Direct Unsubsidized federal student loan options
Unlike both Direct Subsidized and Direct Unsubsidized Loans, which offer income-driven repayment plans, federal PLUS loans don’t offer this option, nor do private student loans. Additionally, both PLUS and private loans may have a higher interest rate, compared to ISAs, plus accrue interest while you’re in school.
You don’t have a long credit history
Both private student loans and PLUS federal loans are approved based on credit, ISAs aren’t.
You don’t have a cosigner
If you don’t have a stable income or good credit, it will be hard for you to get approved for a private student loan without a cosigner. So, if you don’t have anyone that can co-own the loan with you, then an ISA may be the better option as they aren’t approved based on credit, just your future income.
To learn more about cosigners, read our full article.
Your parents or potential cosigners have an adverse credit history
Both PLUS federal loans and private student loans could be denied if your cosigner has an adverse credit history. If that’s the case, you’ll be better off applying on your own for an ISA.
Choose PLUS student loans or private student loans if…
You’ve maxed out Direct Subsidized and Unsubsidized loans and still need to borrow a considerable amount
ISAs typically have a borrowing limit of $25,000 or less, depending on the company, per academic year. PLUS and private student loans can be taken out for the full cost of attendance.
You have good or excellent credit
If you’re working full-time or part-time and have a credit score of 700+, then student loans may be a good option for you, as you’ll be able to secure a low interest rate on the amount borrowed.
Read more: What Is An Excellent Credit Score?
Your parents can afford to take out debt for you
If both of your parents don’t mind taking out loans under their name or cosigning them for you, then private or parent PLUS loans can be a better option. You’ll be able to predict your monthly payments from the start, unlike with ISAs, which will depend on how much you earn, plus secure a low interest rate if your parents have excellent credit.
Still, whether you choose student loans or an ISA, the most important thing is that you understand the terms and conditions, in addition to being mindful of your potential return of investment when applying, to ensure your debt is affordable.
Before you sign on the dotted line
Do your research
There have been several complaints filed against certain ISA companies for misrepresenting their product and engaging in other misleading practices, so make sure you check out the company’s track record before you sign. You can check this out by visiting the Consumer Financial Protection Bureau’s Consumer Complaint Database or by looking up the company name on the Better Business Bureau.
Read everything carefully
Pay close attention to the terms of your agreement. If anything seems funny, ask the ISA provider for clarification or talk to your school’s financial aid advisor.
Compare programs, if possible
As I previously discussed, ISAs can be obtained through your school or an independent provider. If you choose the latter, check out a couple of companies first, so you choose the best deal available to you.
Income share agreements can be a good option to bridge the financial gap when scholarships, grants, and other forms of federal student aid aren’t enough to cover the costs of college.
They are especially a favorable alternative to private student loans, as they offer several protections against loss of income and low earnings that private lenders currently don’t have.