Student debt is a major problem, outstanding student loan debt in the United States is at around $1.6 trillion-the second highest source of household debt in the country.
The price of tuition is still rising, and outstanding debt continues to go up every year. Income Share Agreements (ISAs) are being used as an alternative to traditional student loans and provide a promising solution to the crisis. Income Share Agreements allow students to pursue their educational and career goals while limiting potential financial risk by only requiring payment once said student secures a job.
An Income Share Agreement works differently than private student loan, students don’t have to worry about paying back a principle or mounting interest. If you’re interested in learning more about Income Share Agreements check out this blog post.
Because of how different ISAs are in regard to repayment, it’s important to educate students on the different ways to pay back their ISA. We have a whole guide on how to finish paying an ISA. However, sometimes an analogy is a better way to think about it.
One way we like to think of paying and finishing your ISA is like a race with three runners. The way you complete your ISA payments is that if any of those three runners reach the finish line first, the whole race ends.
Runner #1: Required Payments
In your ISA contract, there will be a specific number of required payments outlined. Required Payments is typically the steadiest runner. This is also the most common way for one to finish their ISA race.
With an ISA, you pay back a percentage of your earnings each month for a set number of months. Each of these payments is considered one of your Required Payments. If you pay all the Required Payments, your ISA race is finished!
For example, let’s say that outlined in your ISA, you are to pay 10% of your income for 24 monthly payments. (this is the number of Required Monthly Payments)
So, based on your income, you pay $500 per month to your ISA. If your income doesn’t change for 24 months and you make each of those $500 payments every month, the Required Monthly Payments completes the race first and your ISA race is over.
As you can see, there is no amount of money that you’re hacking away at. Just make each of those required monthly payments based on a percentage of your income and the Required Payments will finish first.
Runner #2: Payment Cap
The next way that you could finish your ISA race is by paying the Max Payment Cap. The Payment Cap is the fastest runner in the race. This is built into your ISA and is the most you’ll ever need to pay towards your ISA. It is a built-in protection for high earners so that they are not punished for earning more than expected. A Payment Cap is usually some amount more than the Funded Amount (the amount the school is fronting you for their program as part of your ISA). Once you hit your Max Payment Cap, your ISA race is complete!
Following the above example, your ISA terms are 10% of your monthly income over 24 payments with a 48-month payment window. Let’s add one more element. Your ISA now has a Max Payment Cap of $12,000. This time, however, you’re killing it at your job, your income rises and now your monthly payments double up to $1,000. If you had to make your same 24 repayments, you would have paid double the amount over the course of your ISA.
Max Payment Cap is here to finish the race first for you.
If you pay your $1,000 payments each month, Payment Cap will finish the race in only 12 months. You’ll pay the same as if Required Payments finished the race, but you’ll finish the race a full year early!
A couple of quick notes about your payment cap:
Though it can seem like it, a payment cap is not the same as a principal in traditional loans. It is not necessarily a goal to pay this amount back (though you certainly can!). Paying down your Max Payment Cap is something that many get fixed on as being the only way to finish their ISA. It is first and foremost, a protection put in place to keep high earners from paying too much on their ISA and as you’ll discover in this post, there are many ways to finish your ISA!
Runner #3: Payment Window
The last way to end your ISA race is by your Payment Window. The Payment Window is normally the slowest runner but ends strong, and is not the most common way to finish the ISA race. The school or lender with whom you have an ISA, will have a set time period to collect your Required Payments or Max Payment Cap. However, if you have not reached either of those two and the Payment Window ends, your ISA race is over.
This is a protection built into your ISA to help you in case you’re without a job for an extended period. So again, in the above example, your ISA states the school has 48 months to collect payments from your ISA. Let’s say that 12 months into your ISA, you unfortunately become unwell. Consequently, you can no longer work. Let’s say again that you don’t end up getting work until month 45 of your ISA. You make a few more payments but then reach month 48.
Even though you only made 15 payments and didn’t pay back the entire Max Payment Cap, since the 48 months of your ISA Payment Window are up, your ISA race is over. This form of ISA termination is more on the rare side since it is less likely to be without work for a period that long but again, this is a protection built into your ISA should you fall on hard times.
If you’ve ever wondered how to finish paying your ISA, hopefully, we’ve been able to answer all those questions! If you’re ready to jump into a new career using the power of an ISA, check out all the amazing online training programs that offer an ISA on our student's page here!