Depending on the side of the equation you find yourself in, college can either be a business or a life-changing experience. For many students, the change is often positive, while others end up wishing they could go back and do things differently. Usually, the kind of advice you had before and during your college days can set you up for success. Many do not get enough information about income share agreements (ISAs). Hence, there are many misconceptions surrounding the subject.
No sooner than you enter college and your friendly financial aid representatives start presenting you with different attractive student loan packages. However, by now, almost everyone in America is aware that there is a student loan crisis in the country. According to the latest statistics, the total amount of student loans owed by Americans is around $1.5 trillion. Hence, when many hear the income share agreements could be the best alternatives to student loans, they are naturally interested.
Universities around the country decided to combat the burden of student loan debts. As a result, income share agreement (ISA) came into existence. They present the ISA as a smart and affordable alternative to student loans. However, someone once said that, “Today’s solutions are tomorrow’s problems.” And the ISA is just another kind of debt with better packaging.
It is, therefore, imperative to know what ISAs stand for and how they operate.
An income share agreement, in a broad sense, is a financial arrangement in which an institution provides valuable service or product to recipients in exchange for payback in the form of a percentage of the recipient’s income for a predetermined number of years.
In many higher educational institutes in the U.S., income share agreements have gained prominence as an alternative to the traditional system of student loans. Also, there are several private firms and entities that now provide ISA for different purposes. Some of these purposes include tuition funding for a college education.
Generally, people deem such ISAs as less risky to the financial security of the borrowers than loans from private lenders. For instance, this type of borrowing received U.K. financial regulatory approval (FCA). The approval comes through a sophisticated regulatory framework. Hence, the general public and other stakeholders view it as a relatively safer form of borrowing.
However, due to the stringent approval requirements, only StepEx is currently approved to provide ISAs. Also, students in the U.K. can only get ISAs from the post-graduate degree levels offered in some of the top universities and pursuing studies in professional fields. One can conclude that ISAs offer a very practical approach to post-graduate education with the added burden of student loan debt that accompanies higher education in many developed countries.
In the U.S., many well-known universities and colleges have joined the ISA program. For instance, if you choose to pursue a degree in history from Purdue University. When the time comes for you to decide your financing options and you go with an ISA, you can use their comparison tool to evaluate your approximate payments and the number of months you’ll have to pay.
In this particular case, for a history major, when you take out $9,000 per year, your ISA percentage rate will be 4.54%. And you’ll have to pay this for the next 112 months after you graduate and start earning an income. In other words, this is nine years and four months after your graduation.
If you do your maths right, 4.54% of $80,000 will be higher than 4.52% of $60,000. Hence, in those nine years, any time your gross income increases, it’s guaranteed that you’ll be paying for more towards your ISA too. For many, this is a deal-breaker because some believe that instead of spending 4.5% each month on your ISA, you should be investing it in your 401(k) instead.
There is nothing new under the sun, and income share agreements have been around for some time now. Milton Friedman, a famous economist, was the first to propose this system in the 1950s. The first university to try the process was Yale University. However, their attempt failed due to poor coordination and organization of the program.
In the Yale ISA program, higher wage-earning students had to make payments to cover lower-wage earning students’ cost of education after graduation. Things didn’t turn out well for this program. Now, ISAs have been revived with many improvements to the original program that was introduced in 1970 by Yale.
However, there are still some colleges and universities that have not embraced the program. At Purdue University, for instance, you’ll get a limited income share agreement program. In this program, students get funding for their education in full or in part. However, they make payments in fixed amounts based on a fixed interest rate after employment when they’ve finished school.
Also, the University of Utah has commenced provisions of ISAs for 18 of their majors not long ago. Sometimes, colleges and private firms team up to design ISAs for their students. This places more accountability on colleges and universities that are now expected to provide better quality education.
Also, the effort these educational institutions put towards job placement for their graduates receives more attention than ever before. This is because the employment of graduates is in the best interest of the school. Under income share agreements, students don’t owe student loan debts, plus interest. Instead, you’ll owe a fixed percentage of your monthly income, depending on the amount you borrowed to fund your education.
In the entire U.S., there are only a handful of providers that offer students ISAs. Below you’ll find some lenders that will provide you ISAs but first try and find out if their terms and conditions work for you.
Lumni was one of the first and only companies in the country to provide ISAs. The company opened in 2009 and has since then offered consumers ISAs as an alternative to student loans. Mind you; these aren’t personal loans we are referring to here.
If you want to obtain an ISA from Lumni, don’t be surprised if the process is more rigorous than your normal loan application process. Initially, you’ll have to fill out an application form. Next, you’ll take an admission test, followed by a financial simulation before they will seriously consider you for an offer.
ISA providers aren’t many, but the providers that offer ISAs even as personal loans is a total rarity. Hence, Align stands out among other loan providers as one of the rare companies that provide an alternative to personal loans through income share agreements. Through their ISA, you can obtain about $12,500 and take between 2 to 6 years to pay back at a rate of 10% of your income.
Also, you can get a buyout plan from Align when you happen to earn a higher income due to a better paying job. However, this provider isn’t for everyone. The company only operates in New Mexico, Delaware, Illinois, Montana, and Utah. In addition, you’ll have to get a total credit score of about 600 and work nothing less than 35 hours per week, while earning at least $22,000 to receive an offer.
Stride, formerly called AlmaPact, offers ISAs mainly for STEM majors who are graduate students. The company also serves students in the healthcare and business fields. Under the ISAs provided by Stride, students can take out as much as $30,000. Stride expects its students to pay back this amount in about 5 to 10 years after graduation and employment.
The number of years and ISA payback rate you pay after graduation is primarily determined by the individual universities based on your college major. Generally, majors that offer lower starting salaries like English, History, or social service will come with longer terms and higher payback rates. For instance, 5% to 7% over ten years maybe the terms you’ll get.
On the other hand, STEM-related majors such as Mathematics, Science, Engineering, and Technology often give graduates higher salaries, to begin with. Hence, if you’re offering any such majors, you’re bound to have better payback terms like 3% for eight years. The difference is quite significant, and in this case, things can work out way more than if you took out a student loan.
If we were to calculate with Purdue’s ISA comparison calculator, a student who’s reading a program like Aeronautic Engineering Technology, who is set to graduate in December 2020, gets a 3.36% ISA rate on $10,000 for over 96 months (8 years). In this case, such a student’s total ISA payback is $16,523. Should the loan be a Plus loan, the payback will be $17,311. Meanwhile, the payback rises to $19,162 when the student goes for a private loan.
On the other hand, a student with a history major will get an ISA rate of 4.31% for 9.3 years (112 months). We base this calculation solely on the PLUS loans since it’s more favorable for borrowers.
Advocates of income share agreements argue that students can derive several benefits from the ISA that existing college funding models lack. Some of these include the following:
If you are a student, your risks of financial hardship reduce significantly once you opt for an ISA program, especially if you’re graduating with low earnings. As opposed to student loans that impact both the long and short term wealth and career outcome of graduates.
For example, according to recent articles, individuals who trade in the stock market and have student loans find it more challenging to build long term wealth. Marcus Wallace, a 25- year-old waiter based in Washington, D.C., said, ‘My money is spent servicing student loans.”
Also, he explained that until he’s dealt with all his student loan debts, investment in the stock market will have to wait.
Due to ISAs, colleges, and efficiently allocate financial resources based on the individual financial needs of students. Hence, students can attend schools that offer higher completion rates and higher placement for applicants.
Right now, many students “under place” by going to less expensive schools even though these schools may not necessarily meet their educational needs. Also, the prospects of better career outcomes from these schools may be lower. However, students choose such a school due to financial reasons.
Thanks to ISAs, students get the schools they deserve for better career outcomes.
Through ISAs, the incentives of both students and their inventors are aligned. Hence, both parties desire to get the best offers in the job market. With this alignment, a combination of career enhancement and ISA financing opens up to help students excel in the marketplace.
Hence, investors usually provide networking support and career mentoring opportunities to help position them for the best openings in the job market. Often, students with the most need for education funding also lack social capital like career mentors and family-based networks.
These are the very tools that help position more affluent students in better job positions after graduation.
However, income share agreements provide career development to help disadvantaged students overcome such limitations.
According to research, students have more efficient career outcomes through income-based repayments because the process of job search becomes less costly. When you think about it for a second, it makes perfect sense.
Because when you don’t have to worry about making payments for your student loan debt immediately, you have more time to look for better job openings. Usually, these are jobs that assist in growing your career.
ISA like any other form of debt is prone to abuse. Hence, there are major drawbacks that come from inappropriate use.
For example, you may end up not paying the full amount that you initially borrowed. This is because ISAs take payments based on specific timeframes. Also, there are several cases where students end up paying way more than the total amount they borrowed.
For instance, should you go into an income share agreement to pay 0.5% of your future income to 10 years, after borrowing each $1000 to cover your education, making a total of $30,000?! This implies that for ten years, you’ll have to pay 15% of your income after graduation.
The average graduate takes about $50,000 as annual income. Hence, if you get an annual raise of 3%, by the tenth year, your salary will be $65,239. In this case, the total amount of payment you’ll make towards your ISA is $85,979. When you calculate the full increment, you’ll be left with 2.9 times the initial amount borrowed.
Under many ISA programs, you’ll find that there are caps to prevent such high repayment amounts. As earlier mentioned, when Purdue University’s ISA program was first introduced, it stopped the repayment of more than 2.5 times the amount borrowed under the program.
However, this cap didn’t entirely prevent overpayment because some students ended up paying more than they would under a federal student loan. Hence, low-income college students who deem the ISA program more affordable turn out to pay higher amounts through their income than students from wealthy backgrounds.
While ISAs have several proponents that encourage the proliferation of the programs, others have raised some serious concerns that students and parents need to know. Below are some major issues surrounding ISAs.
Income share agreements have several obvious benefits that make them more attractive than student loans. However, like most programs, it’s not for everyone. There are sections of the student population that find it more appealing.
Hence, many speculate that the program discriminates. However, the legal system is yet to document any known cases of discrimination based on gender or race.
Nevertheless, some have concerns that as ISAs become increasingly popular, the likelihood of discrimination may also increase. Hence, concerned authorities have already put in place anti-discrimination laws in most financial industries against such incidences of discrimination. These laws could likely apply to ISA investors.
However, everyone is still trying to find out how these laws will enforce anti-discrimination measures. For others, there is the belief that compared with traditional student loans, ISAs are less discriminatory.
Among all the cited concerns raised about ISAs, the formation of indentured servitude is one of the most frequent. According to arguments by critics of the programs, investors to whom students owe money tend to “own” the student after their graduation.
For example, according to a piece in the New York magazine written by Kevin Rose, ISAs offer “young people in the post-crash economy the chance to indenture themselves to patrons in the investor class.”
Irrespective of this, ISA advocates cite the reasons that the lack of legal obligation and restrictions on where to work prevent “indenture.” Also, investors cannot pressure their borrowers to any particular industry or career. In fact, advocates of income share agreements believe students aren’t any more “indentured” than students with student loan debts.
The choices of someone with a student loan debt are far lesser than those of someone under an ISA program. This is because, in most cases, students burdened by student loans have to get jobs that provide enough income to cover their monthly repayments. However, students with ISAs can decide not to work, in which case, they will not owe the investor any money
Apart from these two concerns, some also worry about ISAs leading to the “creaming” of the best student and elite educational institutions getting all the funds. Ideally, ISAs should fund all students and institutions that offer economically viable programs. Hence, the only condition under which creaming can occur is if the student or institution is not feasible in an economic sense.
Income share agreements depend on time to recoup their full profits. Also, they depend on the economic success of borrowers. Hence, some critics argue that some programs aren’t directly economically viable but hold unique benefits for society that may be neglected.
A good example is a course like Masters of Social Work. This is a relatively expensive degree. However, if you check the annual income of social workers, it’s not very high. Therefore, investors may offer ISAs to other courses within the same tuition range that over better financial returns.
Nevertheless, one may say the same for those reading liberal arts majors. In essence, investors can mitigate this risk by providing other financial alternatives apart from ISAs. Usually, these are grants and loans offered through the federal government.
For students considering income share agreements, as their ideal route to obtain funds for education, you don’t have to sign a contract until you’ve asked and answered several questions.
Also, you have to be sure that the full amount will receive to cover your education is disclosed before any signings and agreements. For instance, if you’ll have to pay a tuition fee of about $14,000 each year, you don’t only get this amount disclosed, you also have to find out the total amount you’ll be repaid under the terms of your income share agreement.
So here is the question in this scenario – Will you pay more or less than your total borrowed funds under the ISA terms?
Hence, experts advise you always ask your friendly financial services rep to disclose the maximum amount you might end up paying. Also, you need to know if there is a cap – Is it a time cap or a dollar cap?
It’s complicated to calculate caps, so ensure things are obvious under the ISA agreement. When we talk of clarity, you want to convert percentages and reactions into dollar terms. Ultimately, these terms should explain your total monthly and yearly costs and how long the payments will last.
In addition, you want to know the impact your ISA will have on your credit score. Will financial institutions treat your ISA as debt? Will your current ISA affect your ability to take out other loans or a mortgage in the future?
Every ISA is different; hence, the effects may differ. As such, you can’t assume the way it impacts your friend’s credit score will be the same as yours.
Furthermore, if your ISA comes from your school instead of a private firm, you need to find out if your school plans to sell the ISA.
In the financial and education sector, there is a concern about ISAs termed “Bennett Hypothesis.” According to the Bennett Hypothesis, for every money available for student loans, college fees, and tuition rise. Hence, many fear the educational institutions, private ones, especially, will increase the price of fees and tuition. Because they know there are limitless amounts of funds available to help fund the payment of such charges.
Congress introduced two bills to help regulate ISAs. These two bills aimed to put a cap on the terms that students receive from ISAs. Also, they addressed uncertainties surrounding several legal issues related to income share agreements and how parties entered the income share market.
Meanwhile, many students who happen to be millennials have adopted a very proactive approach. In this case, they use services like Lumni to get connected to institutional sources of income that provide ISAs.
However, it is very necessary to exercise caution when approaching ISAs. One of the best places to turn to is the financial aid officer of your university.
In many cases, these officers are the best people to determine if you are better off with a traditional student loan. Mind you, the total amount you have to pay upon graduation is always not very clear. Irrespective of what you read online or in any document, you need to get down to the nitty-gritty and do the calculations with an expert.
Though income share agreements have received mixed reactions from different parties in the department of education, policy-making, and the financial sector. It’s essential to weigh your odds carefully. If we consider the introduction of ISAs as one giant experiment, the outcomes could teach all parties essential lessons.
These lessons could help address the current education financial aid sector that appears to need it desperately. Financial aid experts would learn the approaches to the work and the different possibilities that exist for more in-depth research, work, and investment. Also, the U.S. Department of education could use ISAs as an avenue to gain insight into how educational institutes could significantly impact students by financing their post-secondary education.
Generally, there is a growing interest in ISAs. Because most borrowers and lenders have become all too aware of the student loan debt crisis, as such, everyone seems to be looking for an alternative. Not to state that income share agreements are the ultimate alternatives. However, they offer a relatively new way of funding post-secondary education and could break the ground for future improvement on the traditional student loan system.
Meanwhile, Congress has some work to do to ensure consumers remain secure. They need to protect consumers by laying down stringent regulatory and legal frameworks.
Because, it’s not enough that the system seems to help students address problems like financial risk and tuition inflation, among others. The overall structure of the program must be such that it’s sustainable and wouldn’t result in the same crisis as it’s predecessor (student loan debt).
In the meantime, those who are skeptical of ISAs could find other alternatives to finance their tertiary education.
Many students get to the point where they ask themselves if a college education is even worth it. Considering this fact, you need to take on debt in one form or the other to complete your tertiary education.
However, there is good news; you don’t necessarily have to amass student loan debt; or any debt for that matter. Given the options of grants, scholarships, and old-fashioned work, you can still get through college without debt. The only problem, many people do not know-how.
Never forget, a degree is valuable, no matter what you may think. Hence, you can look to the community or junior colleges or in-state schools for the first two years. For parents, the time to begin saving for the education of your children with an Education Savings Account (ESA) might not be what you think.
With an ESA, you can save about $2000 every year for each child. Also, this amount generates income over time, task-free. Ideally, you need to have to tackle your debts before you focus on saving for your children’s education. However, as far as debt-free college education goes, there are other options out there.
To begin, you need to start applying for scholarships right away. These are literally free. Also, it’s better to get a good-paying job immediately and start saving some real cash. Instead of spending money on parties, and expensive lifestyles.
Start creating everyday budgets and stick to them religiously. It only takes about 10 minutes with the right tools. You can get more tips on how to avoid student loan debt by checking out our blog.
There are few ways of financing a college education as hard as cash-flowing four years of college. However, income share agreements aren’t one of these ways. Sure, it’s not easy to abandon easy options like student loans and ISAs for a self-finance option. However, you need to think about the freedom of graduating without any debts. Plus, you get to keep all the money you make after paying your taxes. You will have to pay close to $80,000 to cover the entire four years of education. Ideally, you want to address your financial obligation semester by semester. It may sound far-fetched, but you can get a job, save enough money, and cash-flow your degree. It is possible!