As soon as the initial excitement of a new job starts to subside, new graduates face the daunting question: how to pay off that huge shadow of student loan debt haunting them. With an Income Share Agreement, students don’t have to worry about paying back a principle or mounting interest. However, that then begs the question: How do I fully pay back my ISA?
By far the biggest differentiating factor between ISAs and traditional student loans, other than the protections built-in, is the way they’re satisfied.
With federal loans, you have a principal, the borrowed amount, and an interest rate. You pay back the amount of the principal plus any interest you accrue while paying it back. ISAs work differently which leads to the most common question most people new to ISAs have:
“How do I pay back my ISA?”
Well, it's a bit different. With an ISA, you’re not exactly “paying something back”. There is no principle or interest with an ISA program. If you read our quick and easy guide to ISAs, you’ll know:
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.
There isn’t a principal that one needs to keep track of or pay back. An ISA is an agreement that, after graduation and as long as you’re earning an agreed-upon income, you pay a percentage of your income back to the school (or lender). A better way to ask the above question would then be:
“When is my ISA agreement satisfied?”
With an ISA contract, there are three distinct ways you can finish your ISA:
1. Make the Required Number of Payments
By far the most common way for one to satisfy their ISA obligation is to make the required number of monthly payments.
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.
With an ISA, you have a Payment Window (more on this later) built into it. This is the number of months that the school has to collect your required number of payments. Within that Payment Window, you have a number of Required Monthly Payments. If you pay all the Required Payments, your ISA amount is satisfied!
For example, let’s say that outlined in your ISA, you are to pay 10% of your income for 24 monthly payments. (this is the number of Required Monthly Payments)
So, based on your income, you 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 is finished!
As you can see, there is no amount of money that you’re hacking away at. Just make each of those Required Monthly Payments based on a percentage of your income and you’re good!
But what if your income does change? What if it skyrockets?
2. Pay the Max Payment Cap
The next way to satisfy your ISA is by paying the Max Payment Cap. This is built into your ISA and is the most you’ll ever need to pay towards your ISA. It is a built-in protection for high earners so that they are not punished for earning more than expected. 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 also satisfied!
Following the above example, your ISA terms are 10% of your monthly income over 24 payments with a 48-month payment window. Let’s add one more element. Your ISA now has a Max Payment Cap of $12,000. This time, however, you’re killing it at your job, your income rises and now your monthly payments double up to $1,000. If you had to make your same 24 repayments, you would have paid double the amount over the course of your ISA.
Max Payment Cap to the rescue.
If you pay your $1,000 payments each month, you’ll hit your payment cap in only 12 months. You’ll pay the same as in our other scenario, but you’ll pay it back a full year early!
A couple of quick notes about your payment cap:
Though it can seem like it, a payment cap is not the same as a principal in traditional loans. It is not necessarily a goal to pay this amount back (though you certainly can!). Paying down your Max Payment Cap is something that many get fixed on as being the only way to finish their ISA. It is first and foremost, a protection put in place to keep high earners from paying too much on their ISA and as you’ll discover in this post, there are many ways to finish your ISA!
Another point to realize is that you can make extra payments towards your ISA. These extra payments do not count towards the number of required payments. If you make one of your required monthly payments and then decide you want to pay an extra $500 in the same month, this still only counts as one of your required payments for your ISA.
However, this extra amount does count towards your Max Payment Cap and will lower the cap by that extra $500. If you want to finish your ISA early, paying the Max Payment Cap is the way to do it (you can even pay it all at once!).
But, what if things aren’t going so well? What if you’re without work for an extended period?
3. Reaching the End of the Payment Window
The final way to end an ISA is by reaching the end of the Payment Window. The school or lender who you have an ISA with will have a set time period to collect your Required Payments or Max Payment Cap. However, if you have not reached either of those two and the Payment Window ends, you’re absolved of your ISA.
This is a protection built into your ISA to help you in case you’re without a job for an extended period. So again, in the above example, your ISA states the school has 48 months to collect payments from your ISA. Let’s say that 12 months into your ISA, you unfortunately become unwell. Consequently, you can no longer work. Let’s say again that you don’t end up getting work until month 45 of your ISA. You make a few more payments but then reach month 48.
Even though you only made 15 payments and didn’t pay back the entire Max Payment Cap, since the 48 months of your ISA Payment Window are up, your ISA is finished. This form of ISA termination is more on the rare side since it is less likely to be without work for a period that long but again, this is a protection built into your ISA should you fall on hard times.
If you’ve ever wondered how to finish paying your ISA, hopefully, we’ve been able to answer all those questions! If you’re ready to jump into a new career using the power of an ISA, check out all the amazing online training programs that offer an ISA on our student's page here!