An Income Share Agreement can unlock possibilities that a traditional loan isn’t capable of. It gives those without the means the power to pursue the education they’ve always wanted, ensures they get a career at the end of it, protects them in case they lose that job, and helps schools and online programs fill seats that would otherwise be empty. Sound pretty great right?
However, ISAs have one major issue: They have a bit of a PR problem and there are two big reasons for that.
For one, ISAs are still a fairly new financing model for most people and are relatively unknown. In fact, A 2017 American Enterprise Institute study of 400 college and high school students and parents found just 7% of students and 5% of parents even knew ISAs existed.
The second reason they tend to be obscure is because they are so different from loans or any other financing model and that can make them seem intimidating. Many people have no idea what an Income Share Agreement is let alone how they work.
Our mission at Meratas is to make ISAs as widely available as possible so that everyone can benefit from them. To do that, we’re here to make them as easy as possible to understand.
Here’s everything you need to know to understand what an ISA is:
What is an ISA?
If you need to remember one thing about what an ISA is, it’s this:
An ISA, or Income Share Agreement, is an agreement between a student and a school where in exchange for covering the cost of that student’s tuition, the student agrees to pay back a portion of their income after graduation for a set amount of time as long as they are earning an agreed-upon yearly income.
This is what an ISA is at its most basic level. It is not a loan or anything like a mortgage. It is a way of financing that is totally unique.
Most of us understand financing through loans. With student loans, you are given a large sum of money to pay for school and then, regardless of whether or not you have a job, you not only have to pay back that original amount but you also have to pay back whatever interest you accrue before you pay back the original amount.
An ISA is completely different.
You don’t get a sum of money upfront that you use to pay for school then pay back plus interest. Instead, your tuition is completely waived and you go through the program at no upfront cost. Instead of paying back a principal with interest, you agree to pay back a percentage of your gross annual income (generally somewhere between 7-12%) for a set number of monthly payments and only if you have a job making an agreed-upon annual income. This is the easiest way to understand an ISA. You share a percentage of your post-graduation income over a set number of monthly payments to satisfy your repayment.
Another concept that puts ISAs in a class of their own are the built-in student protections. This makes them an even more appealing option over traditional student loans to those looking for a less risky financing option. Let’s break them down.
Don’t pay until you get a job. Stop paying if you lose it.
An ISA is designed and based on the understanding that a student needs an income in order to pay it down. After all, how can one expect someone to share a portion of their income if they don’t have one to share? ISAs are designed in such a way that a student only begins payments on them if they have a job. Think of it as insurance for your education.
In addition to not beginning payments until they have a job, this benefit also incentivizes the school to help get the student a good-paying job. Otherwise, the school cannot collect payments. Many schools and programs that offer an ISA also guarantee the student receives a job at the end of their education. This aligns the program’s goals with the students, fostering a trusting relationship between the two.
Additionally, ISA payments are paused if a student loses their job. Again, if the student has no income, they can’t share a percentage of it back to the school. This is a protection that you simply will never find in any loan.
If you make under a set amount, payments are also paused.
In addition to having your payments paused when you are unemployed, your payments will also stop if your income falls under a set annual income.
This is called the Minimum Income Threshold.
The Minimum Income Threshold (or the Income Floor) is an annual salary that is agreed upon by you and your school when your ISA is signed. That means you need to be earning at least the Minimum Income Threshold in order to begin payments on your ISA. This means if a student has to take a job that doesn’t meet the Floor, their payments are paused.
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.
If you’re earning more than expected, your payments are capped
Let’s take a look at the other side of the coin. ISA monthly payments are based on your income, so they can fluctuate. If you’re earning less, you pay less each month but as your income goes up, so do your payments.
Let’s say you have an ISA with your school where you pay 10% of your income. When you first graduated from the program and got your job, you made a starting salary of $50,000. This, divided by 12, made your monthly ISA payments come out to roughly $416.
Now, let's say your company took off and you were at the front of it. In just two months, you double your income to $100,000 making your ISA payments $833.
You doubled your income, but also doubled your payments.
If you have to make 24 monthly payments to satisfy your ISA, if you were earning $50,000 for those 24 months, your total payments would add up to $9,984. Compare this to the $19,992 it would be if you were earning $100,00 over the same period. That’s over $10,000 more if you’re earning higher! This would be a major flaw in signing up for an ISA.
Enter the Payment Cap.
If your total payments meet an agreed-upon Payment Cap (outlined in your ISA just like the Minimum Income Threshold) then your ISA is considered satisfied. So in the above scenario, if you made the $100,000 and had to make your 10% payments for 24 months and your Payment Cap was $10,000, your payments would end at month 13 instead of the full 24 months! This is because, although there were still 9 ISA payments left to make, your total payments through month 13 totaled your payment cap of $10,000.
This is yet another protection for the student. If you’re making more money than average then you are protected from having to pay larger amounts over the same period of time. Your payments are capped at an agreed-upon amount and you are not punished for making a higher income.
This is all you need to know about ISAs and the basics of how they work.
If you’ve ever thought about using an ISA to up-skill and level up your career, there’s never been a better time than now. Looking for the best online training programs that offer ISAs for financing? Check out our Student’s page. Meratas is also the number one resource for all things ISA so if you want to learn more, check out our Blog!