As the cost of college continues to feel out of reach for many students, schools and bootcamps are beginning to think of new ways to finance the cost of higher education. Income Share Agreements (ISA) are one method winning the attention of educators and students. An Income Share Agreement (ISA) is a contract between a student and their school, skills training program, or lender, where in exchange for an education, the student agrees to share a fixed percentage of their post-graduation, pre-tax earnings over a set period of time.
Many schools know how student loans work and how they are paid through federal loans, but how a school gets paid through Income Share Agreements is different. It’s important to know how an ISA is paid back so you can plan accordingly since, in many cases, you won’t receive a large sum of money upfront.
How does an ISA work?
An Income Share Agreement (ISA) is a contract between a student and their school, skills training program, or lender, where in exchange for educational financing, the student agrees to share a fixed percentage of their post-graduation, pre-tax earnings over a set period of time. The money advanced through the ISA is not a loan. It is an investment in the student’s future earning potential.
There is no accruing interest, no principal balance, and no penalty if the amount ultimately repaid is less than the amount funded. Since the ISA is tied to the student’s income, payments will always remain manageable despite any unforeseen changes to your earnings. ISAs include a Payment Floor and Cap.
Repayments are suspended when earning less than the Floor, and total payments will never exceed the Payment Cap. If you would like to learn more about ISAs check out this Ultimate Guide to Income Share Agreements.
Loans compared to Income Share Agreements
With traditional student loans, schools may partner with a lending company or encourage their students to use an outside lender for their tuition. The student would borrow the money they need for school and then repay that precise amount, plus interest, until the loan is paid in full. The student might take out a loan with an outside lender and then the lender would give the entirety of the loan payment to the school upfront. The student would then pay back the lender over time but as the school, you’ve already received the full tuition amount.
This isn’t always the case and you may be receiving payments from students, but for many schools with a traditional loan, the school will receive the full amount of tuition upfront.
Income Share Agreements work a little differently and may leave you confused if you’re not prepared for it. Instead of owing a concrete debt, students promise a percentage of their future earnings for a defined period. This means your student doesn’t necessarily have a specific dollar amount they must pay each month, as the percentage approach allows the payment to vary.
Outside vs. self funding
The ISA repayment process works differently depending on if a school has outside funding or not.
If a school has an outside lender, their lending terms for an ISA program will vary depending on the lender’s terms. Typically, a school will not not receive the full tuition amount for the student up front. Instead, they might fund half of the tuition amount to the school up front, then the other half later on when the student graduates or makes their first ISA payment.
The outside lender also has a say in whether they will fund a student's ISA. So even though a school approves a student, the lender has the final say in whether or not the student gets approved for outside funding. If the student is not approved the school can choose to fund the student themselves, though.
Meratas partners with outside ISA lending companies to help our partners finance their ISA program. If you’re looking for funding for your ISA program, check out our Partner page and book a meeting with an ISA specialist today!
Here are the different ways a school could receive payments for Income Share Agreements if the school is funding the Income Share Agreement program:
1. Payment through the required payments
There are three different ways that a student typically pays off their Income Share Agreement. If you’re not familiar with how Income Share Agreement payments work from the student’s perspective, check out this post.
The first way a student can pay off their ISA is by finishing the required payments. Essentially, the student is required to make a set number of payments based on their income as long as they’re making above a certain income. For example, outlined in a student’s contract they could have 24 monthly payments. The 24 payments are the required payments and once the student has made all of those their ISA is completed.
As such, schools will not receive a large sum of money all at once. Instead, they will receive each of their ISA student’s required payments each month over a period of time. A student may decide to make extra payments on their ISA which the school will receive too although this isn’t considered a required ISA payment.
Another thing to note again here is that, because payments are calculated based on a student's income, the payments you receive each month will fluctuate with each student's income. This could come as a surprise to schools and programs that aren't prepared for it.
One way to prepare yourself for this is to take the average salary of what a student in your program earns post-graduation and plug that number into your ISA payments terms. You can then use this number to determine the average amount you'll receive for students in your ISA program even if some earn more or less than the average.
2. Payment through the Payment Cap
The second way a student will pay back their ISA is through the payment cap. The payment cap is the most a student could ever pay back to the school and is typically anywhere from 1.2 to 2x the original amount the student received for their education.
This is not a guaranteed total that a school or program will receive from a student under an ISA. Instead, this is a protection built in to keep higher earners from paying too much on their ISA.
It is possible that a school will receive a full payment cap from a student over time but only if that student is a high earner and their total payments add up to the payment cap over time. Students who would like to finish their ISA obligations early may also do so by paying the full amount of their payment cap or make extra payments towards their cap each month. This will allow them to hit this payment cap and end their ISA early.
The school will also receive the payments each month from the student, but since the ISA is linked to the student’s income through a percentage, the total each month could vary based on changes in the student’s income. This is why the full amount of the payment cap is not guaranteed to the school, but it is still possible to receive the full amount.
Also, if the student, for some reason absolutely refuses to pay their income share agreement the ISA servicer may send the student to collections. Normally when this happens the student is sent to collections for the full payment cap amount.
3. Payment through the Payment Window
The final way a student can finish their Income Share Agreement is through the Payment Window. The Payment Window is a set time period the school has to collect the student’s Required Payments or Max Payment Cap. If the student does not reach the Payment Cap or complete their Required Payments in the time period of the Payment Window, the student is finished with their ISA even though they did not make all of their required payments.
The payment window is generally 2 to 2.5 times the number of the required payments. For example, if the student’s Required Payments is 24 monthly payments the school will have a 48 month Payment Window to collect those Required Payments. Typically, this is the least common way to satisfy an ISA since it is unlikely that a student will be without work for an extended period of time.
If the school is using an ISA servicer, such as Meratas, then the school will receive the total of their student’s payments in a lump sum each month. Meratas also takes care of collecting the money from each student and ensuring that the student is charged the correct amount based on their monthly income.
Income Share Agreements are a great tuition financing tool for students. However, it’s important to know how they work and how a school will get paid so you are not caught off guard, and can plan accordingly. If you want to learn more about what to think about before offering an Income Share Agreement check out this blog post. Are you ready to offer an ISA program through your school? Click here to book a meeting with a Meratas ISA specialist who will help you get the process started!