College still provides a strong return on investment for many students. But the risk profile of that investment has gone up dramatically with the cost of college in recent years. One way that schools are sharing the risk and reward of education with their students is through the use of Income Share Agreements (ISAs).
With this type of agreement, students pay nothing, in most cases, until after they complete their program. Then, once a student has finished the program and becomes successfully employed using their new skills, they pay a percentage of their income for a set period of time until they have either reached the Required Payments, Max Payment Cap, or Payment Window.
Income Share Agreements have a whole host of student benefits that are often absent from traditional private student loans. For example, there is something called the Minimum Income Floor, which is the minimum amount a student needs to earn before they begin paying back their ISA. There is also a payment window, which is the set time frame that the ISA funder has to collect all of the required payments under an ISA.
In today's post, we're going to take a look at the ISA student benefit known as the payment cap.
The Payment Cap
One way to satisfy your ISA is by paying the Max Payment Cap. (The most common way to pay back your ISA is by making all the required payments. Read about the different ways to pay off your ISA here). The Maximum Payment Cap limits the maximum amount of income a high-earning student is required to share. This is in place to ensure that high earners do not overpay on their ISA.
The Max Payment Cap is built into your contract and is the most you’ll ever need to pay towards your ISA. 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 is completed.
For example, let’s say your agreement terms dictate that you pay 10% of your monthly income over 24 required payments (read more about required payments here.) Let’s say your Max Payment Cap is $12,000. Based on your income, you would pay $500 per month to your ISA. If your income doesn’t change for 24 months and you make each of those $500 payments each of those months, your ISA would be finished. But let's say, you’re crushing it at your job, and 10% of your income would now be $1,000 a month. If you had to make the same 24 repayments, you would pay double the amount over the course of your ISA.
However, that's where the max payment cap comes in. Instead of doubling all of your payments for the same 24 months, you instead would just continue making your monthly payments until the total sum of all your payments reaches the Max Payment Cap. If you pay your $1,000 payments each month, you’ll hit your payment cap in only 12 months thanks to the payment cap. You’ll pay it back a full year earlier than if you were making the 24 required payments!
The Cap Paydown
The Cap Paydown is a feature for higher-earning students to pay off their ISA as quickly as possible. The cap paydown is a feature of our ISA design that Meratas makes available to all our partners as an option to offer to their students.
This gives students who have an income while they are in their program the chance to potentially lower the overall cost of their ISA significantly over the course of the contract.
Essentially, the Cap Paydown allows students to make smaller, fixed payments (usually a few hundred dollars) each month while they are still in their education program. These payments continue until they find a qualifying job and are making above the Minimum Income Threshold outlined in their ISA, at which point they then switch over to making their ISA payments. In exchange for making these payments while in their program, students receive a discount on their Max Payment Cap of either the total amount of the initial payments made or a flat amount.
For example, let’s say your Max Payment Cap would be $15,000 in your ISA. But if your program offered a Cap Paydown and you started making $300 monthly payments during the program, your payment could be lowered by $3,000 to $12,00 depending on the terms of your program’s Cap Paydown.
This feature is especially important for students who are confident they’ll be able to get a well paying job after graduation and know they’ll reach the Payment Cap before their Required Payments or Payment Window are up.
Meratas is the only ISA platform that offers this student benefit as an option to partners on our platform and is one of the many benefits of working with Meratas for all of your ISA needs. Ready to offer an Income Share Agreement program at your school or educational institution designed to increase student enrollment and accessibility? Partner with the leading Income Share Agreement software company that provides a full-service, turnkey, SaaS platform to design, originate, and manage ISAs.
Although every effort has been made to provide complete and accurate information, Meratas Inc. makes no warranties, express or implied, or representations as to the accuracy of content contained herein. Meratas Inc. assumes no liability or responsibility for any error or omissions in the information contained herein or the operation or use of these materials.