Income-sharing agreements are becoming increasingly popular as a way of paying for school
In 2016, Wake Forest graduate James Bacon decided to graduate. After completing his four-year degree and taking out student loans to cover the rest, he thought he would do the same for his advanced degree from the University of Pennsylvania.
Ultimately, however, he discovered a program that would cover his college bills without student loans, provided he agreed to lose a percentage of his salary later. This was made possible by an Income Share Agreement (ISA), as these contracts are called.
According to Bacon, an income-sharing arrangement was ideal at the time because it enabled him to avoid further student loans. Additionally, he liked the fact that the future monthly payment was predictable and based on his income.
“When I made more money, I could afford to pay more, but when I wasn’t I didn’t have to worry about getting a job I wanted and being able to support my family,” he said.
This flexibility led Bacon to work with his brother-in-law on a company called Edficiency, a scheduling software that his brother-in-law had developed for his own school, which was spread over 20 schools the previous year. If he had fixed student loan payments instead of an ISA, he might not have had the chance to work at a start-up on a lower salary, he says.
How do income-sharing agreements work?
Most of the time, if you’re wondering how income-sharing arrangements work, they work the way they would sound. Finance attorney Leslie Tayne of the Tayne Law Group says that income-sharing arrangements are typically made in the form of a contract between a student and a school or a third party. The main point of an ISA is that the student can avoid borrowing if they agree to pay a percentage of their salary for a period of time, as long as that salary is within certain thresholds.
For example, Tayne says a school could have an income-sharing agreement for 20% of the student’s salary for two years, with a threshold of $ 40,000 per year and a maximum payment of $ 30,000.
“If the student earns $ 50,000 a year, he would pay $ 20,000 in those two years,” notes the attorney, adding that a student who earns $ 100,000 a year will lose money during that period because of the maximum payment block would pay $ 30,000.
According to Tayne, there are many potential benefits for students who qualify for an ISA instead of a student loan. In the case of student loans based on a fixed loan amount plus compound interest, income sharing agreements are dependent on the student’s salary. In addition, a student who loses their job would not have to make payments until they find another job that meets the income limit.
Mark Kantrowitz, author of How to Apply for More College Funding, also points out that if you fall below your income, the obligation to pay an ISA can be suspended.
âAfter all, the lender wants a percentage of your income when your income is high, not when it is low,â he says.
Kantrowitz says ISAs can be a good choice for students whose religion or culture prohibits paying interest, such as Islamic and Russian Orthodox students.
Disadvantages of Income-Sharing Contracts
Interestingly, students using an ISA may pay more for college than if they had borrowed the money directly. It all depends on what their contract is like and how much they earn in their future careers.
“Some students, such as students in lucrative courses, may pay more with an ISA than with a student loan,” says Kantrowitz.
He also points out that unlike student loans, ISAs are not regulated. This means that people considering this type of agreement need to dig deep into the fine print so they know exactly how much to repay, under what terms, and what the total cost of using the ISA is.
While Bacon is happy with the way his ISA situation has gone, he also points out that ISAs offer less flexibility in terms of repayment. In particular, he disliked the fact that you have to pay for a certain number of years and you usually can’t pay off your ISA any faster.
Who Should Consider an ISA?
Taking out student loans for higher education isn’t the end of the world, but would an ISA make most people better off? It really depends on the individual and their goals, says John Ross, CEO of Test Prep Insight.
Ross says students who get a well-paying job after graduation, such as an electrical engineer who makes more than $ 100,000 a year, may write a substantial check to their university every year – possibly more than they would have, if they chose to borrow the money.
The bottom line is that students research what they can earn in the first five to ten years after graduation and look at the terms and conditions of both funding models, Ross says.
“If a student earns a substantial amount of money after graduation from working in a lucrative field like engineering, medicine, or law, direct student loans, especially federal loans, may be preferable.”
That being said, Ross says, income-sharing arrangements could be a great funding strategy for students who don’t expect to make any significant amount of money after graduation. For example, if you have a career in an area you love but may not get paid much, you may end up paying less with an ISA than you would with a student loan.
Tayne also says that students who are unsure whether the career they are aiming for is right for them are well suited for an ISA.
“If they can’t find a high-paying job or find that the field isn’t right for them, they may not have to make payments,” she says.
The bottom line
Only you can decide if an ISA is worth exploring or if you prefer to borrow for college the old-fashioned way. Whatever you do, run the numbers for each scenario so you know how much your degree will end up costing.
While ISAs may grow in popularity, they have the potential to cost students more in the long run. Student loans aren’t perfect either, so do your research and choose your poison accordingly.