Updated on October 12th, 2018
Many students are striving to avoid student loans entirely. They use a combination of grants, scholarships, and savings to pay for school or choose less expensive colleges to stretch their education dollars.
However, a new option for avoiding student loans is making the rounds: the income share agreement (ISA).
Student loan debt is an epidemic in America. Earlier in the year, the total outstanding amount in student loans alone crossed $1.5 trillion for the first time in history, marking an ominous milestone.
These income share agreements look to help students avoid becoming part of the student loan debt statistics. They require students to promise a percentage of their future earnings to the school. In exchange, they don’t have to pay for all or a portion of their tuition upfront, letting them avoid student loans.
But would it be a smart move for your child to commit part of their future salary as a means of avoiding student loans?
If you’re curious about these income share agreements, here’s what you need to know.
How Does an Income Share Agreement Work?
With traditional student loans, your student would borrow the money they need for school and then repay that precise amount, plus interest, until the loan is paid in full. The arrangement is fairly simple, usually resulting in a set monthly payment over a particular amount of time. However, the payment plan your child selects does impact their student loan payment, so it doesn’t always remain the same for the entire repayment period.
An income share agreement works differently. Instead of owing a set debt, students promise a percentage of their future earnings for a defined period. This means your student doesn’t have a specific dollar amount they must pay each month, as the percentage approach allows the payment to vary.
Additionally, in some cases, an income share agreement has a repayment limit, ensuring your student doesn’t repay more than the cost of their education.
In some cases, a fee or interest is added to the repayment amount. However, some schools, like Purdue, don’t charge interest for using an income share agreement.
Students also receive some protection during periods of unemployment or when their earnings fall below a certain threshold, lowering the chances that their obligation will become a hardship.
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Benefits of an Income Share Agreement
Even though your student would still repay their education costs with an income share agreement, they aren’t technically loans. However, they provide similar protections when compared to federal student loans in many cases.
A percentage-based repayment mechanism can provide some level of security, not unlike the income-based approach to repaying federal student loans. If your student has to take a lower paying job at any point during their career, the repayment amount adjusts, making it more affordable in a month-to-month sense.
Additionally, your child might not have to make payments while unemployed or could have the obligation forgiven should they suffer a permanent disability.
Many students view income share agreements as safer than private student loans because of the federal loan-like mechanisms. Plus, one benefit over even federal student loans is that an income share agreement may be dischargeable in the case of bankruptcy.
Some also claim that using an income share agreement encourages colleges to help graduates find better jobs. Since the payment is based on a set percentage of a student’s earnings, higher paying positions means they can be repaid faster.
Drawbacks of the Income Share Agreement
Income share agreements are by no means perfect. There are some caveats that can make the program more expensive than loans, depending on how the contract is structured.
While many schools put a limit on the total amount that can be repaid during the agreed-upon period, that isn’t always the case.
This means, if your student promises specific percent of their income over the course of their contract and there isn’t a limit, they could end up paying substantially more on an income share agreement than if they had taken out student loans.
Even if a limit is in place, that doesn’t mean it isn’t high. For example, Purdue’s agreement sets the limit at 2.5 times the original cost. If your student’s education came with a $40,000 price tag, that means they could be stuck repaying an astonishing $100,000, depending on the salary they end up earning.
In comparison, a $40,000 student loan with a 6 percent interest rate and a 10-year repayment period totals out to about $53,000 including principal and interest. That’s a $47,000 potential difference!
Additionally, while the program does offer protection against a variety of situations, like unemployment, missing a payment still carries loan-like penalties. This can include late fees, damage to their credit score, and even being deemed in default.
The documentation requirements for an income share agreement are also fairly cumbersome, though they don’t differ dramatically from the income-based repayment options for federal student loans.
Students must provide proof of their income to set an initial payment, and then submit new documentation whenever their income changes or during the annual reconciliation period. Failing to provide the required proof of income means an automatic increase to the payment amount may be added or, if they don’t deliver the details for an extended period, could lead to automatic default.
If the school has to try and recover the debt, your student could be on the hook for additional costs, including the school’s legal fees or other expenses related to collection.
Should Your Student Consider an Income Share Agreement?
It’s important to note that income share agreements are only available at specific schools, including Purdue and Norwich University. They are by no means common options, but new colleges continue to explore them as possibilities, so there may be more participating schools in the future.
Additionally, not everyone qualifies for an income share agreement. These are more commonly offered to students who otherwise can’t get traditional student loans, so your child may not be eligible.
However, if your student has access to an income share agreement, reading the fine print is a must. Your student should also do the math regarding how much the plan could cost them, especially when it comes to the repayment limit amount, to determine if student loans are actually a lower cost option.
Plus, regardless of whether your student is considering loans or an income share agreement, it’s always wise to pursue repayment options that don’t have to be paid back, like grants and scholarships.
Ultimately, every dollar that they can cover without acquiring debt or an income commitment is worth going after.
If you’d like to learn precisely where to find these scholarships, and how your student can secure them, check out our free scholarship training webinar: 6 Steps to Quickly Security Scholarships for College