Student loans are a common way to fund college, but they’re not your only option. Income share agreements (ISAs) are an increasingly popular alternative for covering tuition and fees. Let’s explore how ISAs work and how they might help you finance your education.
- Income Share Agreements (ISAs) are contracts between borrowers and funders, in which the borrower agrees to pay a portion of their future income for a set period of time.
- ISAs can be used to cover tuition costs and other expenses related to college.
- Eligibility requirements vary depending on the funder but ISA's typically do not require a minimum FICO score or income to qualify.
- Repayment is based on an agreed upon percentage of income when the borrower earns above the minimum income threshold.
What are Income Share Agreements
An Income Share Agreement represents an innovative approach to financing your education. Under this agreement, you're provided with the necessary funds to cover your educational expenses, in return for a commitment to pay a portion of your future income to your financier. Unlike traditional student loans that require repayment based on time and interest, this model offers a unique repayment method based on your earnings after graduation. This alternative financing solution aligns the interests of both the student and the funder more closely and could be an option for students seeking a flexible repayment plan tailored to their financial success.
How Do Income Share Agreements Work?
When you borrow money via an income share agreement, you will not be charged an interest rate as you would with federal financial aid or any private loans. You commit to paying a percentage of your future income for a set period of time, or until you reach the payment cap.
ISA payments are based on a fixed percentage of your income, and we should stress that not every program or field of study will qualify, because there needs to be some assurances that individuals will be able to pay the money back. Unlike loan payments based on your loan balance, income share agreements establish your payment on a fixed percentage of your earnings. Some ISA’s also have a minimum income threshold, meaning you will not have to make payments during periods of time when your income falls below that threshold.
Note: Income-Driven repayment options for federal student loans loan debts are also monthly payments based on your income, but interest still applies.
With an ISA program, you will not accrue interest, and most plans will only require repayment for up to 10 years. If your ISA has a minimum income threshold, you will not be required to make payments if your income is below that amount. But any period when your income falls below the income threshold may or may not be counted towards your total repayment time. Remember each ISA income share agreement is different, and just as with student loans, you will want to do your homework to understand what you are committing to.
Pros and Cons of Income Share Agreements
| Pros | Cons |
|---|---|
| Your repayment term is limited to ten years, but can be five years or less | Your repayment term is limited to ten years, but will likely be five years or less. If you earn a high wage, you may end up paying back far more than you borrowed (in some cases it could be double). |
| No minimum FICO or current income requirements | No minimum FICO or current income requirements. Since an ISA is not considered a loan, you may not be able to refinance the debt. Also, your future earning potential will be a big factor. |
| You will not accrue interest on the money you owe. Taking out multiple ISA's could require you to pay a significant percentage of your income during repayment. | You will not accrue interest on the money you owe. Taking out multiple ISA's could require you to pay a significant percentage of your income during repayment. |
| ISA's do not require a cosigner | Periods of unemployment may not always be counted in your total repayment term |
| Repayment terms are not as rigid as they are with private student loans (i.e., if you are unemployed, you will not be making payments. Private student loans do not always offer this protection, though some may offer brief periods of deferment). | Repayment terms are not as rigid as they are with private student loans (i.e., if you are unemployed, you will not be making payments. However, once employment is resumed, payment will resume. Private student loans do not always offer this protection, though some may offer brief periods of deferment). ISA funders may not offer ISA's to all students. There may be major or degree requirements. |
| Because payments are tied to income, payments remain affordable | |
| Payments are flexible and easy to budget as they always represent a percentage of your income | |
| There are many unknown questions with ISA’s such as tax implications and laws pertaining to this type of debt. |
How are the Terms of an ISA Determined?
Eligibility, income percentage, and length of your repayment term will all be determined by your income share agreement ISA funder. Your income share agreement funder will evaluate your career plans, education history, program of study, and plans for the future in order to determine eligibility for college financing and terms.
How to Get an Income Share Agreement
Some schools offer their own income share agreements (which may be limited to specific programs). If you’re looking at an ISA contract provided by your school, contact your financial aid office for more information.
If you are looking to use an outside ISA funder, the process works similarly to that of student loans, where your school would certify the funds as they would with a private student loan lender.
The Importance of Cash Flow
One important benefit that comes from having an income share agreement is that payments are based on cash flow. If you are unemployed and lack access to capital, you are not required to make payments on your income share agreement until such time that you are employed again. On the other hand, if you are employed and making a substantial amount of money, your payments will be based on your income.
What is a “substantial amount of money” when it comes to repaying your ISA? Terms of each ISA will vary between funder’s; however, they will explain what your minimum income threshold is in order to make a payment. If you are making an income below your minimum income threshold, you will not be required to make payments.
Tips for Negotiating Your Contract
Unlike federal student loans, income share agreements do not accrue interest. Keep in mind, not all terms or ISA’s can be negotiated. But if you are able to negotiate, here is what you need to know going into the negotiation of your income share agreement contract.
- Use available information to be as informed as possible to negotiate your contract fairly and plan for the future.
- Research on typical salaries for workers in your field of study, so you have an accurate understanding of what your monthly payments may be since income share agreement repayments are based on income.
Make sure that you are borrowing only the amount of money that you need and make on-time payments. Your ISA funder will need to take action if you default on your payments and fail to meet the requirements of your contract.
Student Loans with No Credit
While an ISA income sharing agreement is a non-traditional student loan, it may be an excellent option for students who do not have the credit or a creditworthy cosigner to qualify for a private student loan. While ISA funders may run a credit check to ensure you don’t have adverse credit, there is no minimum FICO score or income to qualify.
However, your area of study and future earning potential will play a large part in your eligibility.
Note: An ISA income sharing agreement is a non-traditional student loan, meaning you will not be eligible to refinance the debt as you would with a private student loan.
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