At Meratas, we believe Income Share Agreements (ISA) are part of the solution to the current educational financing. Though still a newer concept, Income Share Agreements have become an educational finance alternative to private student loans. If you aren’t familiar with them, an Income Share Agreement typically grants a deferred tuition option in exchange for a percentage of the student’s pre-tax income after graduation.
This model has grown in popularity in higher education and according to a 2019 Career Karma report more than forty colleges and coding bootcamps offer ISA programs and that number is only growing.
When it comes to offering your own Income Share Agreement at your program, it’s important to ensure you know why you’re offering the ISA, if the ISA fills a financial gap in your program, and how you will initially fund your ISA program, among other things. Thinking of offering your own Income Share Agreement program? Ask yourself these 10 questions to get started.
1. Why is the Income Share Agreement being offered?
This question is perhaps the most important on this list. Every other question on this list depends on how this first question is addressed. The purpose behind your ISA contract will influence the design of your program and the terms offered to students.
Many colleges and programs use ISAs to address a strategic goal such as accessibility. That’s why ISA terms tend to differ from program to program. For example, the University of Utah offers an ISA program called Invest in U. The program’s purpose is to target students who tend to “stop and start” enrollment to reduce costs and avoid student loans, taking a long time to graduate.
A student can take out up to two separate ISAs, one for fall/spring and one for summer. In that scenario, the student can pay the loans at the same time (i.e., pay 5.7 percent of salary for 65 months) or consecutively (2.85 percent of salary over 130 months). This program has cut the percentage of students who take out federal student loans; bringing it to 30 percent compared to 65 percent of students nationally who graduate from public and private nonprofit colleges.
Along with knowing why you’re offering an ISA is also important to ask if your ISA is helping to support students who need more financial aid than what your program already offers.
2. Does the ISA fill a gap in your financial aid system?
Take a look at your current financial aid options. Do they fit the needs of your students? Or do you need a way to make the course more accessible to more students? Is there a gap in your current financial aid offerings that an ISA would be able to fill?
For example, Colorado Mountain College launched Fund Sueños (Dream Fund) for students who cannot access federal aid. Income Share Agreements can also fill a gap for those who have exhausted their Title IV funding or those who would have a higher interest rate on a private loan.
Your ISA program should fill critical gaps that aren’t being met by the public federal and state funding system.
3. Who will benefit the most from the ISA?
From the beginning, the ISA’s purpose needs to be clear. Transparency with Income Share Agreements is important because ISAs are not for everyone. Students should be taught and be familiar with their payment cap, minimum income threshold, and their payment window because depending on their possible future income, they could be paying back differing amounts throughout their ISA contract.
Your ISA should, of course, put your students first, but it’s also important that your ISA is generating enough money to keep the program running, and keep your tuition from rising. Your ISA terms should help increase the accessibility to your program and align risk between the student and school.
For example, income thresholds can vary from college to college, many range from $20,000 to $40,000 per year. Income share percentages also vary and tend to fall between 1%-12% though sometimes more. How much funding students can receive also varies, and is up to the college. The University of Utah offers between $3,000 and $10,000 while Colorado Mountain College offers $3,000 max per year, and Clarkson offers up to $10,000 a year. One other thing to keep in mind is that if you're trying to create a fair set of terms across different fields of study, then you may need to vary the terms of the ISA by field of study because expected income is going to vary. For example, the University of Utah, offers its Income Share Agreement for students in 18 majors, from chemical engineering and economics to communications and special education.
4. How do you know what students need and how do you change your program as your student’s needs change?
Incorporating student involvement will help to raise important questions, such as, ‘How does the ISA work with my traditional loans and other aid?’ ‘What do these contract terms mean?’ ‘What happens if I can’t make my ISA payments?’. Take all of these factors into consideration when deciding whether or not an ISA program might be right for your school. It’s important to keep students in mind while designing or altering your program.
5. Will you be able to offer support for students to understand your ISA?
It’s important to have a couple of people on your admissions team familiar with Income Share Agreements and how your specific ISA program is structured. The Meratas team is always more than willing to help you with any questions you may have about your terms, but it’s still important to have part of your team well versed on your ISA program as well. There will be times when the student loses his or her job and their ISA needs to be put into deferment. Students are also strongly encouraged to speak with a financial aid advisor before deciding on an ISA so it’s important to know your specific terms and how much the student could potentially be paying.
For example, the San Diego Workforce Partnership provides information on any programs or scholarships to apply to first that may cost the student nothing, and then requires all ISA holders to meet with an advisor and consider all options for a few days before signing the ISA agreement.
6. Who’s funding the ISA and what are their expectations?
It’s also important to consider if your school has enough funding to front the cost of an ISA until your students graduate and start to pay you back or if you will need outside funding. One of Meratas’ partners, Edly, provides investing for ISA programs, but there are other investors that invest in Income Share Agreements to help provide access to education for promising students. The University of Utah, for example, began its ISA with $6 million from university funds, donations, and impact investments from family foundations.
If you are self-funding your ISA program, it does involve some degree of risk since repayment is linked to your student’s future earnings. If you have a strong career placement program for your students, this is less of a concern.
7. What third-party partners are necessary?
ISAs require capacity for financial services like origination, data storage, and collection of ISA funds. There is a lot that will go into managing an ISA program. Trying to manage ISAs in-house can be difficult. While we have met some schools managing their ISA payments on spreadsheets, this method tends to be overwhelming and tedious. You have to keep track of student employment information, graduation dates, payment adjustments as the student's income changes, and keep track of the number of payments students have made and how many they have left.
Meratas provides all of these services under one software platform making it easier to run your ISA program. 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. Ensure the ISA servicer you choose has all the tools you need to effectively run your ISA program.
8. How does location affect the program?
When it comes to offering a great ISA program to your students, context matters, particularly the local labor market dynamics. Standards of living vary across the country, especially when it comes to student debt, repayment, and defaults. Study the data to set reasonable terms such as minimum wage thresholds for specific communities and occupations.
9. What legal framework is necessary to be aware of and follow?
Although there are no federal regulations yet set on Income Share Agreements there are varying state to state regulations that are important to be aware of. If you choose to offer your program online, in person, or as a hybrid it’s important to follow these state-to-state laws. Meratas helps you to build your program by the most strict state regulations so that you can so you can know that your program will be state compliant. No matter the legal framework, ample, universal consumer protections for students must be in place. ISA providers can help with this by establishing a high bar, rather than waiting for minimum standards to be defined by policymakers.
10. What does success look like?
It’s important to continue to ensure your ISA’s outcomes are successful by assessing the educational, financial, and social outcomes for students, providers, and investors. Here at Meratas, we are dedicated to ensuring your program succeeds by having your own ISA team of customer support agents, data auditors, and ISA specialists. We also have a phone support line for any questions your students may have as well as your own marketing materials and self-help library.
Answering these questions can help you prepare to set up a successful ISA program and find the best solutions for your students. Though ISA programs require some upfront work, they yield amazing results. However, you don’t have to go at it alone! At Meratas we offer ISA solutions for every step of the journey. From helping you create an ISA program based on your needs all the way through student payment collections, and everything in between, Meratas has you covered every step of the way. If you’re interested in offering an ISA to your students, check out our partner's page to get started!
Topics: income share agreements