Difference between Income Share Agreements ( ISA ) and Student Loans

The spiking student debt of $1.6 trillion has become a matter of concern for America. In 2019, around 5.2 million student loan defaults were reported, which further sparked heated debate across the country. Many people wonder if there is a better financial resource to pay for higher education or is there any escape from the mounting student debt that keeps on increasing with each passing year. The student loan is just like a noose around the neck that keeps on getting tighter if the student borrowers fail to pay back their monthly loan payments. What if there is a way out to student loan that allows students to share a percentage of their future income for a particular period to cover their educational costs? One such method is the Income Share Agreement which can be a reasonable alternative to a lifetime student debt. Let’s understand the difference between Income Share Agreement and Student Loan.

What is an Income Share Agreement (ISA)?

Income Share Agreement or ISA is a contract as per which the students get the funding for education & in return, they agree to pay a fixed percentage of their future earnings to the ISA provider for a stipulated time after completing the college. ISA provides favorable repayment terms to student borrowers.

The concept of ISA is not novel. Instead, it was introduced as a model of repayment back in 1950 by the economist, Milton Friedman. However, the implementation of Income Share Agreement has become indispensable now because of the rapid increase of student loan defaults in America. The US universities & colleges are earnestly looking for useful ways to facilitate students with their educational expenses. Therefore, the colleges are providing more ISA options to draw a large number of student enrollments.

The whole purpose of building the ISA system was to ensure that each student can pursue their desired degree course without any debt bondage constraining their endeavors.

Income Share Agreement keeps payments affordable by interlinking repayments to the student employment outcomes. It safeguards college graduates from defaulting in situations wherein their degree doesn’t help them land a job. Thus, if your educational experience doesn’t pay off, you don’t have to pay either.

How does an Income Share Agreement (ISA) work?

Under the Income Share Agreement, you need to start repaying unless you pass the income threshold after completing your degree and getting a job. So, in case you lose your job, or make less than the agreed amount, then you can stop making repayments. Unlike the traditional student loan system that compel students to pay a fixed monthly payment, ISA has flexible terms of repayment. The Income Share Agreement provider will determine how much you’ll pay each month based on the ISA terms & your projected salary.

Here are the key elements of an ISA contract:

  • Income Share Percentage- The percentage is not an interest rate but a portion of your gross monthly income which you will pay to the Income Share Agreement provider. As per the State of the Income Share Agreement Market, 2019, colleges have an income share between 2% to 10%. So, if an ISA contract has 2% income share rate & the student gets an annual salary of $50,000, then his/her monthly payment will be $83 (2%* $50,000 /12 = $83).
  • Payment Cap- It refers to the maximum amount you will pay under the Income Share Agreement. Hence, if you get a high paying job, the payment cap will protect you from overpaying to the ISA provider. The payment cap is fixed and never changes throughout the payment term, despite any change in the student’s income. Generally, the payment caps range from 1.5x to 2x the tuition amount.

  • Payment Period- The ISA contract obligatesstudents to make income-based payments for around 10 years or until they reach the maximum payment cap.
  • Minimum Income Threshold- To protect students from experiencingany financial distress, each ISA contract provides a minimum income threshold of $30,000. Thus, students don’t have to make repayments until their annual income is lower than the specified amount.

  • Payment Term- The payment term is the maximum no. of payments you’ll have to make within a fixed payment window. The number & length of payments window may vary as per the institution. Usually, the payment term ranges from 36 to 108 or 120 monthly payments for learning programs, colleges, & universities. The obligation to make payments also ends at the close of a payment window, even if you fail to pay the pre-agreed no. of payments within the payment term.

Salary Floor- The salary floor is the income threshold below which ISA payments are forgiven or deferred. For instance, if an Income Share Agreement has an annual income floor of $30,000, then the ISA payments for a student making less than $30,000/12 = $2500 will be forgiven or deferred.

Pros and Cons of Income Share Agreement

There are some perks and downsides of the ISA program, which are as follows:

Advantages

  • Zero Upfront Fee Required- The biggest benefit of Income Share Agreement is that it allows students to pursue any degree of their interest without stressing on paying the college fees. So, one can focus more on studies and performance instead of worrying about the monthly interest rates.
  • Ease of Accessibility- Another perk ofISA is that it doesn’t have strict eligibility criteria. In contrast to loans that have many deadlines, there are no difficult terms of enrollment to get financial aid under the ISA contract. Thus, anyone who wants to enroll in a program that supports ISA can do it without much hustle.   
  • Does not overburden borrowers with never-ending debt– The traditional student loan system never comes with a repayment cap which means there is no limit to the maximum amount of repayment in loans. Students even end up paying double the amount they have taken in the traditional loan methods. Whereas in the ISA there is always a maximum payment cap that limits your total financial liability.  
  • Higher Flexibility- It is not so easy to renegotiate or restructure student loans. So, student borrowers who don’t get much professional success in life may end up getting buried deep under the hefty debts; which is less likely to happen under an Income Share Agreement, as people who don’t earn much after graduation are never asked for repaying and may even get a payment forgiven option.

Disadvantages

  • ISA is Unregulated- Federal loans and Private Student Loans are regulated in a proper way, but ISA is relatively a new concept that doesn’t have any defined rules about how to operate. Hence, some Income Share Agreement Companies use it to their advantage and offer low-value ISAs or programs that may seem cheap, but end up being more expensive than the student loans.
  • Less into Practice- At present, only a handful of US universities has acceptedIncome Share Agreement program while the tradition loans are still going strong in terms of usage & being a more reliable financial resource for students. However, the popularity of ISA is likely to grow in the future, considering the state of the student debt crisis. 
  • ISA does not have the same level of protection as the federal loan- Federal loans give many protection options to the student borrowers such as low-income consideration, public service forgiveness, & others which aren’t available in the ISA program. 
  • Not getting placements– Sometimes, students struggle to get jobs years after graduation so, they fail to make repayments of ISA. If you want to avoid such a situation, you should look for those Bootcamps and Universities that have been in the business for the long run and have a higher success rate. Check the student outcomes and then enroll in a program.

Comparison between Income Share Agreement and Student Loan

Here is how the Income Share Agreement differs from student loans:

Terms of DifferencesIncome Share AgreementTraditional Student Loan System
FlexibilityStudents who have signed up an ISA contract will only pay a fixed amount of money once they start earning above the minimum threshold until they reach the payment cap. So, higher flexibility of repayment is given to the borrowers to in the ISA contract.There is less flexibility for repayments in the tradition student loans as you have to repay the amount of the loan along with the added interest regardless of you being unemployed or having a low-income job.  
SafetySince ISA has the maximum payment cap, it saves student borrowers from making excessive payments. The borrowers get done with the ISA payments till their payment window is over and they have made the total no. of required payments.In the private student loans, students are often overburdened by the fixed monthly loan installments and taxes which keeps on piling up over the years.   
Time DurationISA ends much faster than the traditional loans as they follow a 10 years payment term. It means that your obligation for making payments ends after 10 years no matter how less you have paid. The traditional loans compel the student borrowers to make payments for decades until their total loan amount is paid off. 
Minimum Income ThresholdThe biggest difference between an ISA and student loan is that the former has a minimum income threshold which students need to attain after graduation before making any payments. In case, you lose your job or there is some financial difficulty in making the payments, then you also get the option to pause repayments until you get back on track financially.In private loans, students are obligated to repay the amount side by side while pursuing their education. A bill comes each month and if you fail to make loan payments for 270 days, then your loan will go into default.

Conclusion

While both ISA and traditional loans are good financial aid options that help students to pay for colleges and higher education, one can find plenty of differences amongst them like repayment options, borrowing limits, time duration, and much more.

If you seek to explore different job options before jumping into a career, then you should go for ISA contract that gives more flexibility. Income Share Agreement empowers borrowers to pause their payments when they are making less than the minimum threshold or during the stage of unemployment. ISA frees you from any financial burden until you become capable of repaying the borrowed amounts. Thus, ISA can be an excellent alternative to student loans in America.

Many coding bootcamps and some universities have already recognized the potential of ISA in restoring the economic condition of the United States. The adoption of ISA can be beneficial for everyone from students to lenders and for the country as a whole. ISA is the future of higher education.

As ISA is correlated to your earnings, you should pursue those courses that will provide higher starting salaries such as Majors in STEM (Science, Technology, Engineering, & Mathematics). STEM majors have better repayment terms, like 3% for 8 years, which will be much affordable for you to pay. To acquaint yourself with the latest technologies of Java, Machine Learning, Data Science, Python, MERN Stack and AWS, reach out to SynergisticIT, the best programmers in the bay area!  We have designed a comprehensive learning program for tech enthusiasts who wants to build a career in the IT sector. Our aim is to give career-oriented training to transform beginners into adept coders. Keep your ears to the ground as we might soon be launching an ISA program to assist our students. Do you have a knack for programming? Let’s help you achieve your career goals.