Income share agreements (ISAs) are a new alternative to student loans where funders pay for a student’s schooling up front and then, instead of asking for the same amount back, they ask for a percentage of that student’s salary over the course of a set number of years.
ISAs can be a productive option for students who want to go for a degree that their parents may be unwilling to pay for, or if they’re low income and don’t have anyone to cosign for their loans.
However, the market for income share agreements is largely unregulated, so there’s a lot of burden on the student to make sure they’re keeping up their end of the deal.
How do ISAs work?
ISA providers or funders (like Vemo Education or 13th Avenue Funding) agree to pay a student’s tuition in exchange for a percentage of that student’s earnings over a set amount of time. The percentage they calculate has less to do with the actual cost of school itself as much as the earning potential the student is estimated to have.
In this way, funders act more like investors than lenders as the success of the student (especially the salary they graduate with) directly affects their forecasting and profit.
Each funder has different ideas of what constitutes a student as a “worthy investment” — they may ask for a student’s credit score, employment history, or intended concentration in their vetting process.
As of 2018, there are only a few thousand students taking part in this kind of school cost repayment model with relatively few funders (especially compared to the student loan industry). So the success of this emerging model is not yet known.
One study estimated that only “around 7 percent of each year’s entering, first-time student cohort (about 272,500 students) and no more than 5 percent of each year’s first-time, lower income student cohort (about 82,000 students)” would be eligible for this kind of financial aid.
Some funders, like Purdue University’s “Back A Boiler” program, use money from philanthropic sources, which means any paid interest goes toward causes that many students would describe as socially conscious.
How ISAs Differ From Loans?
Because ISAs are not loans, they do not accrue interest and most plans cap the total they can get at twice the initial payment. Because of this, they may be a good option for some students looking to avoid the open-endedness that loans provide.
Consider this simple example:
(NOTE: Each ISA may have many more stipulations, benefits, or penalties than this example, but this is the general way