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An income share agreement, or ISA, offers funding for college that you repay based on your future salary. ISAs are not student loans, nor should you use them instead of undergraduate federal loans.
Consider an ISA instead of high-interest loans, such as federal PLUS loans or private student loans — especially if you plan to enter a high-paying profession. You'll likely get the most favorable repayment terms.
What is an income share agreement?
An income share agreement is a contract in which you receive money for your education. In return, you promise to pay the ISA provider a fixed percentage of your income for a set amount of time after you finish school. You may repay more or less than the amount you received, depending on your agreement's terms.
“You promise to pay the ISA provider a fixed percentage of your income for a set amount of time after you finish school.”
College ISAs have roots back to a 1955 essay by famed economist Milton Friedman that explored the potential of investing in "human capital" to pay for education. While formal ISA programs have gained steam recently, they are still relatively uncommon.
Tonio DeSorrento, chief executive officer and co-founder of Vemo Education, a company that sets up and manages ISAs for schools, estimates that roughly 50 colleges have their own ISAs. That doesn't include alternative education programs, like Lambda School’s online bootcamps for coding, that use ISAs exclusively instead of student loans.
Most ISAs are run by colleges for their own students, sometimes with private capital sources. But you can get an income share agreement from a few private lenders, such as Stride Funding, that you can use at most schools.
How do income share agreements work?
Income share agreements are unregulated, so each can work differently. In general, you'll start repaying an ISA after you leave school and pass a specific income threshold. If you lose your job, you can stop making payments.
How much you'll pay each month and overall will depend on your specific ISA's terms. The ISA provider will determine these based on characteristics like your college major and projected salary. ISAs are not credit-based.
Income share percentage. How much of your gross income you'll pay every month. College ISAs typically have income shares between 2 and 10 percent, according to the 2019 "State of the Income Share Agreement (ISA) Market" report from Career Karma, a website focused on tech careers.
Salary floor. How much your salary has to be for payments to be due. An ISA's salary floor should reflect your expected post-graduate income. For example, Lambda School's salary floor is $50,000 because it expects graduates to get starting salaries of at least that much.
Payment cap. The most you'll have to repay under your ISA. The payment cap is typically a function of how much you received — such as two times that amount. Watch out for caps above 2X borrowed, as well as ISAs that don't have a payment cap at all. You could repay far more than you got.
Repayment term. How long your ISA contract lasts. Repayment terms typically range from two years to 10 years. Some ISAs will count months in which you earn less than the salary floor toward your repayment term. Others extend your repayment term in these instances.
Here's an example of how these terms come together to make an ISA work:
Say your ISA requires you to pay 5% of your post-grad income over a 10-year repayment term. If your salary started at $52,000 and increased 4% each year over the 10-year term, you’d initially pay $217 each month and $31,216 overall. If that ISA required 18% over two years, you’d initially pay $780 each month and $19,904 overall.
Estimate your ISA payments
Is an income share agreement right for you?
Whether an income share agreement is worth it will depend on your individual terms.
Consider the example above: If you received $20,000, you’d actually save money by paying $19,904. If you paid $31,216, it would be similar to repaying a student loan with an interest rate of 5.23% — which is still a competitive rate.
You should compare ISAs and student loans to ensure you get the best deal possible. For an ISA, that will likely be the case if you know you'll go into STEM, health care or another field with strong salaries and growth potential.