Student debt in the US has grown significantly since the passage of the 1965 Higher Education Act, which mandated the Federal government to guarantee student loans made by banks. As a response to the 1.5 trillion in student loan debt, many are starting to rethink tuition funding.
One educational finance alternative to private student loans is Income Share Agreements. The Income Share Agreement (ISA) structure is relatively consistent. To define it more directly, an Income Share Agreement grants a deferred tuition option in exchange for receiving a percentage of the student’s pre-tax income after they graduate.
This model has grown in popularity and forty colleges and coding bootcamps either offer ISA programs or are in the process of developing them, according to a 2019 Career Karma report.
When it comes to offering your own Income Share Agreement at your program, it can be difficult to know where to start. It's important to have the right tool to carry out the program. One that can manage and keep track of all of your students as well as their payments. It may seem difficult to know what to look for in a good ISA management tool. We hope that this guide is useful in clarifying what makes a great Income Share Agreement product.
1. Keeps an Active Running Record of Student Payments
Handling an Income Share Agreement on an excel spreadsheet can be difficult to say the least. There is a lot that goes into seamlessly implementing and managing an ISA program. In order to manage and analyze your ISA program effectively, income verification, payment processing, and support for students are all necessary.
Not only are there regulatory guidelines that are important to follow, but keeping an active running record of student payments is important to ensure each student is paying an accurate amount towards their ISA and that the ISA is being carried out fairly. A good ISA product will also allow you to see the student’s history of payments all in one place. With automatic tracked payments you can see which payments have been made, which have been missed, and there is no need for someone to manually collect the payment and then record it.
2. Automatically Adjusts the Payment Cap, Required Payments, and Payment Window When a Payment is Made
Predicting how much a student will ultimately repay can at times be tricky. Income Share Agreements have three ways in which they are satisfied.
- Pay the payment cap. The payment cap is built into the ISA and is the most you’ll ever need to pay towards your ISA. The payment cap is typically around 1.5-2.5 times the total amount of funding received.
- Paying the number of required payments is probably the most common way for an ISA to be satisfied. With an ISA, the student pays back a percentage of your earnings each month for a set number of months. Each of these payments is considered one of the Required Payments. For example, if the student needed to make 12 required payments, if they paid back a percentage of their income for 12 months without missing a payment, their ISA is over.
- The payment window is an added protection built into your ISA to help you in case you’re without a job for an extended period. The school or lender who you have an ISA with 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, you’re absolved of your ISA.
With an Income Share Agreement product, it's important that the system automatically adjusts the student’s payments. Some programs start by running their ISA on a spreadsheet like Excel. Automation with an ISA product helps to keep everything running smoothly and accurately. Instead of having to triple check rows and columns and ensure each student’s payment cap, payment window, and required payments is adjusting correctly, a good ISA management tool will keep track of everything and automatically adjust each time a student makes a payment.
3. Automatically Adjusts Students' Payments When Their Income Changes.
Calculating a student’s monthly payments can sometimes be complex. For example, students might get a grace period of a few months immediately after graduation or if they experience hardship, such as job loss or a medical need. Most ISAs also come with salary floors for repayment, meaning a student won’t begin paying back their ISA until they'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. Whenever a student’s income drops below that salary floor, whether they lose their job or take a job with a salary lower than that payment floor, their payments are paused and an ISA product needs to be able to automatically stop those payments until their income climbs above that payment floor again. A student's income will also fluctuate if they were to get raises meaning that their payments will change along with it.
A good ISA product will prompt students to keep their income updated frequently so that ISA payments are always accurate. ISAs can be difficult to track. Since ISAs are based on a student’s income, if their income changes their payments change too. A good ISA product will evaluate a student’s income as it changes and adjusts their payments accordingly.
4. Automatically tracks students through each phase of the ISA journey
An ISA product needs to be able to automatically track exactly where a student’s income is throughout their entire ISA journey. For the most part, while a student is going through the program, they aren’t required to make payments, but once they graduate and start earning over their payment floor it’s important to track where the student is at so that collecting the monthly payment amount is correct. Meratas partners with several authentication platforms, to collect the student’s specific bank account information.
A great ISA product should give the student an easy place to apply for their ISA program. The school should then be able to easily review each student’s information and then approve the student for an ISA contract. Once the student has been approved the system should automatically take over and know when the student graduates, when they get a job and are in repayment, and update if the student is in deferment due to income changes and when they have finished their ISA obligations. A good ISA product should be able to seamlessly track all of these things with multiple students.
Quality education does not have to be financed with traditional student loans that acquire more interest over time. Income Share Agreements are a great alternative and supplement to student loans! But, trying to manage ISAs in-house is difficult.
Meratas partners with schools and boot camps that offer training for today’s important skills in different careers. From student applications through collections, our full-service software will make running your Income Share Agreement program easy. Meratas' intuitive, ISA platform can handle all the above and more. You can focus on your program’s specialties while we handle the payment side of ISAs. If you would like to schedule a call to talk about how an ISA could be a great addition to your program’s financial aid, check out our Partner’s page!