Who Should Use an Income Share Agreement?

Opt for free money and most federal student loans before considering an ISA.
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Written by Anna Helhoski
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Income share agreements, or ISAs, provide college financing in exchange for a percentage of your income after graduation. ISAs are a good way to pay for college only if you have a funding gap and the following are true:

  • You've maxed out your federal direct loans.

  • You don't plan to work for a nonprofit or government employer.

  • You would pay less with an ISA than with a PLUS loan or private student loan, or don't qualify for these options.

Even if you check all these boxes, you'll still want to carefully consider if an ISA is right for you. Here's when an income share agreement may and may not make sense.

When an income share agreement might be worth it

You've exhausted better options

Before borrowing, always opt for money you don't have to repay — like scholarships, grants and work study. Once you've exhausted those, use undergraduate federal direct loans to fill any remaining tuition gap.

Undergraduate federal loans have competitive interest rates, low fees and repayment benefits that private options lack.

But those loans also have a borrowing cap. If you've bumped up against that, compare ISAs and student loans to determine which will cost the least and make the most sense to cover your remaining costs.

You have a clear vision of your future

ISAs are a better option if you have a pretty good idea of what you'll be doing — and how much you'll be earning — after school.

Income projections determine ISA terms. Terms will typically be more favorable if you're entering an industry with high salaries or consistent employment. That's because you would offer the investor a better return on investment.

For example, if you’re majoring in liberal arts, an ISA may require more of your income for a longer period of time than if you planned to enter a potentially more lucrative STEM or health care field.

But if you do end up with a higher income, you could end up paying significantly more than you received for your ISA. Given that, look at the payment caps for ISAs before accepting any agreement. Any cap over 2X what you borrowed is a red flag.

Ultimately, there's no way to be 100% sure of your future income. Sites such as PayScale, Glassdoor or the Bureau of Labor Statistics can help you estimate starting salaries and average earnings for your career.

It's great if you surprise yourself and earn more than those numbers. But that would also mean forking over more money for your ISA.

You don't qualify for student loans

Unlike private student loans, ISAs are not credit-based. That can make opting for an ISA a good option if you have no or bad credit, or if you don't have a co-signer who can help you qualify for a loan with competitive terms.

Some ISA lenders will disqualify you based on your credit history.

Private ISA provider Stride Funding won't offer an ISA to students with a previous loan default, for instance. In that way, some ISAs may be similar to PLUS loans, which aren't available if you have adverse credit history.

ISAs may also be available if you don't otherwise qualify for federal financial aid. For example, Colorado Mountain College in Glenwood Springs, Colorado, has an ISA for Deferred Action for Childhood Arrivals, or DACA, students.

You prefer the benefits of ISAs

Unlike a student loan, you won’t have a fixed payment hanging over your head with an ISA.

That may make you feel like you can explore more opportunities after college — such as traveling, starting a business or taking a lower-paying job — without worrying about big debt payments.

You may also prefer some other benefits of ISAs vs. student loans:

  • You have to earn enough to pay. ISAs typically have a minimum income threshold, or salary floor, you have to meet before payments start. With student loans, the amount of time you can halt your payments due to financial hardship is typically limited.

  • No payments are due if you lose your job. After all, you can’t owe a percentage of your income if you have no income. Your repayment term typically will freeze until you find work again, though some ISAs count periods of unemployment toward your total term.

  • ISAs are eligible for bankruptcy. It's difficult, but not impossible, to dismiss traditional student debt in bankruptcy. But an ISA would be treated like other unsecured payment obligations, such as credit card debt. That means a court could dismiss the payment obligation if you were to file for bankruptcy.

When you shouldn't use an ISA

You'll qualify for loan forgiveness

If you plan to work for a nonprofit or government employer, pursuing Public Service Loan Forgiveness, or PSLF, will likely be less expensive than an ISA. PSLF forgives your remaining federal loans after you make 120 eligible payments while working 10 years for a qualifying employer.

For example, private ISA provider Avenify lends to nursing students only, in part because of the predictability of the profession. But if you planned to work at a nonprofit like a hospital after graduation, you would likely want to opt for debt that would qualify for nursing student loan forgiveness.

You're worried about your total debt

Unless getting an income share agreement is the only way to finance your educational program — such as Lambda School's online bootcamps — it's possible you'll have loans and an ISA. ISA funding amounts are typically enough to supplement federal loans, not totally replace them.

To keep your overall debt affordable, aim to avoid committing more than 10% of your projected after-tax monthly income the first year out of school. That can be difficult with an ISA, as it could take 10% or more of your salary all by itself.

Stick with federal PLUS loans if you're worried about affording payments after you graduate.

Federal loans offer income-driven repayment plans, which are similar to ISAs because they tie payments to a set percentage of your income. For income-driven plans, that amount is typically 10% of your discretionary income.

You prefer student loan benefits

Forgiveness and income-driven plans are big benefits for federal student loans. But private loans may have benefits that ISAs lack but you value:

  • Early payoff. If you're entering a potentially high-paying profession, like law, you may want to save money by paying off your debt early. But not all ISAs offer this discount. Instead, you would have to pay the ISA's payment cap, which could be two times or more what you borrowed.

  • No regulations. Unlike student loans, ISAs have been unregulated and have no explicit consumer protection laws. That has meant that there's no requirement for a provider to follow industry best practices, like having a minimum salary floor or maximum repayment cap. But that could soon change: The Consumer Financial Protection Bureau, or CFPB, a federal regulatory agency, has said that ISAs are student loans and are subject to the same rules and regulations that apply to traditional student loans.

  • Lack of certainty. The imprecise nature of ISAs makes it impossible to determine exactly what your monthly payments will be, so it’s more difficult to calculate costs ahead of time. You may prefer the steady, predictable payments of a student loan, which you can’t expect with an ISA.

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