We know that ISAs can be confusing. They’re an uncommon way of financing that includes many terms people may not be familiar with.
To better understand ISAs, we’ve created this glossary of the key terms. With an ISA, you pay a fixed percentage of your income over a set period. Your payments will vary based on your gross income: Make less, and your monthly payments are lower; make more, and your monthly payments are higher. ISAs were created to prevent unsustainable debt (large monthly payments, low salary) and to align incentives between schools and students.
If you’ve ever read through an ISA and been confused, you’re not alone. We compiled this guide of key terms to help you understand your ISA. Here are the key terms to review when considering any ISA:
Income Share Percentage - This is the fixed percentage of your monthly pre-tax income that you agree to share during your contract term. Income shares can range from 2.5% to as high as 17.5%
Funded Amount - The amount of money you’ve been funded for your education. Think of this as the amount you would have paid upfront in tuition but is being funded to you through an ISA.
Monthly Payment - This is what you pay back on a monthly basis after you've graduated during the term of your ISA contract. To put some numbers to this, if your Income Share is 5%, and you’re earning $60,000 per year (or $5,000/month), your Monthly Payment would be $250/month.
The Minimum Income Threshold - The Minimum Income Threshold (or the Income Floor) is a minimum income below which students don't have to make payments. These typically range from $20,000 to $50,000 but sometimes more depending on the industry and program. In addition to protecting students who are earning less, this once again incentivizes a school to put their money where their mouth is. It’s their way of not only promoting the income you could earn when going through their program, it guarantees it.
Payment Cap or “Ceiling” - Your payments are capped at an agreed-upon amount, so you are not punished for making a higher income. This provides some protection to students who are extraordinarily successful from making unreasonably large payments. Generally, these caps range from 1.5x - 2x the tuition amount.
Payment Window - This is how long your ISA contract lasts. The window typically ranges from two years to 10 years. Some ISAs will count months in which you earn less than the salary floor toward your repayment term. Others extend your repayment term in these instances.
Required Payments - By far the most common way for one to satisfy their ISA. 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.
Grace Period - Most programs offer a grace period of at least 2-3 months after the end of a program before ISA payments would begin. This period gives everyone some time to start their job search without worrying about ISA payments or having to report on income immediately.
Contract Term - Contract terms are typically set between 48-84 months depending on your degree and chosen career, but maybe terminated sooner if you reach your Payment Cap.
Automatic Deferment - During periods of involuntary unemployment from sickness or other unforeseen circumstances, or if your income drops under a certain amount (the Minimum Income Threshold), your payment obligation will be automatically waived without penalty. Unlike loans, where you must apply for temporary deferment, with an ISA agreement, your payments will be suspended automatically during periods of economic hardship. Think of it like having an insurance policy protecting your loans.
We know that since ISAs are a relatively new form of financing, they can be a bit confusing. We hope this helps answer some questions you may have about ISAs! Want to learn more? Click here to read more from our blog!