ISA Post, student loans Post

A Guide to Income Share Agreements vs. Student Loans

Anna Klawitter August 10, 2020

Every day we read or hear of young people - some not so young anymore- who slowly fall behind on their student loans. With student debt in America amounting to $1.6 trillion, total outstanding private student loan debt at $124.65 billion, and 5.2 million student loan defaults in 2019, many are beginning to look for different options to pay for education.

Student debt follows you and grows bigger each day casting a shadow over your work with no thought to whether you’re doing well or poorly. Analysis reveals that 34 percent of students with just $5,000 of outstanding student loan debt default on their student loans. This default rate continues to stunt financial growth. 

So, we’re considering better ways to pay for your education.

What if you never had to take out student loans to pay for school? What if, instead of borrowing a large sum of money at a certain interest rate, you simply promised to share a percentage of your future earnings for a period of time to cover the cost of your chosen education? What if that same agreement came with protections that pause your payments when things aren’t going how you expected them to? 

That's the basic idea of Income Share Agreements, or ISAs. The Income Share Agreement concept is not a new one. It's been around since the 1950s when economist Milton Friedman introduced them as a model of repayment. The implementation of ISAs is new, though, as student-loan defaults spike, and schools seek to offer other ways to help their students pay for their education. 

 ISAs are built to ensure students can pursue the education they need without a dark cloud of debt blocking out the sunlight of their endeavors. ISAs keep payments affordable by linking repayment to employment outcomes. They protect students from defaulting in situations where their educational experience leads to a less than ideal job. In other words, with an Income Share Agreement, if your education doesn’t pay off, you don’t pay either. 

Here are a couple of ways that Income Share Agreements differ from traditional loans:

 

1. If you don’t have a job or make less than an agreed-upon amount, you don’t make payments

There's this myth that states if you have a college degree you have a job. Sadly, that's not the case these days. Approximately 53% of college graduates are unemployed or working in a job that doesn't require a bachelor's degree according to Washington.edu. 

With private loans, you’re obligated to pay them back 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. 

ISA payments are different. While both financial aid options can help you pay for college or graduate school, you’ll find plenty of differences when it comes to borrowing limits, repayment options, and more. If you are unable to get a job after graduating or want to explore your options before jumping into a career, with an ISA obligation you’re given flexibility. 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 great job.

 

2. More flexible than private student loan debt 

Unlike a student loan, you won’t have a fixed payment with an ISA. 

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. You’re finished with your payments once your Payment Window is over, your Payment Cap (the maximum amount of money that could be paid back) has been reached, or if you have made the total number of required payments (whichever comes first).

In an ISA contract, let's say, for example, you were to go to 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 student loan payments, whether you’re the Barista at Starbucks or the analytics specialist, you pay the same flat amount plus interest.

 

3. An ISA is an investment in your future

Under an Income Share Agreement, students can make better choices in their higher education because they aren’t limited by finances.

 Because their future funding is dependent on graduates securing paid employment, many schools may offer job search assistance. This helps students to feel secure when they are picking a school or program because they won’t have to make payments until they secure a job. 

“An ISA acts very differently than a federal loan,” Josh Shapiro, assistant dean of research affairs at UCSD, said. “A federal student loan is debt. It’s an obligation that needs to be repaid regardless of circumstance. An Income Share Agreement flips the model and it can be seen as an investment in an individual that is only repaid contingent upon students’ success.”

Schools have little incentives to help graduates find a good-paying job post-graduation under traditional loans because their payments are not tied to the student’s income, and a lender will have likely already paid them for your tuition. 

An alternative to the student loan crisis in America is long overdue. We believe ISAs are a great option. It’s time for a change and ISAs can be that change. If you’re looking to jump into a new career through an Income Share Agreement funded education program, check out our student’s page for a list of schools that offer an ISA program, and jump-start your career today!

Topics: ISA, student loans

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