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There is a student loan crisis in America, and some universities and financial institutions are looking for creative ways to help students pay for higher education expenses.
Income-share agreements (ISAs) are one such solution, but this student loan alternative comes with some downsides to consider. In short, when you enter into an income-share agreement, you agree to pay a future percentage of your salary for money now.
This guide will explain exactly how income-share agreements work, whether they’re a good idea or a bad idea, and a few ISA lenders you can consider if you decide one is right for you.
In this guide:
- What is an Income-Share Agreement
- Where to Get an Income-Share Agreement
- Benefits of Income-Share Agreements
- Downsides of Income-Share Agreements
What is an Income-Share Agreement?
Income-share agreements are contracts in which a lender, company, or school agrees to give students money in exchange for a share of their future income.
While not exclusively for students, those who need money to fund their education are the biggest target demographic of this new loan product.
In particular, people earning STEM degrees or degrees that are likely to lead to high post-graduate salaries are often prime candidates for ISAs.
Examples of an ISA Loan
To understand the costs, let’s consider two examples:
- You enter into an income-share agreement in which a lender gives you loans for your higher education costs in exchange for 6% of your post-grad salary over 10 years. If you made $50,000 per year during this entire 10-year period of time, you’d pay $250 per month each month and would make a total of $30,000 in payments.
- If your salary is higher, or the percentage of your income you have to pay is higher, then your loan would cost you more. Say you made $75,000 over the decade you had to pay your lender 6% of your salary. Your monthly payment would be $375 and you would pay back a total of $45,000.
- As you can see, salary increases benefit the lender. So income-share companies tend to target students likely to earn a high income within a few years of graduation. Some lenders also target highly paid professionals, such as doctors, who are in need of personal loans.
Where to Get an Income-Share Agreement
Income-share agreements are a relatively new product, so your options are more limited than they would be if you were searching for a private student loan. However, new companies and even universities are emerging every year with income-share programs.
Below, you’ll find one company offering income-shared agreements and another that offers income-based repayment loans.
Stride is another company offering an alternative to student loans. Its income-shared agreement comes with several benefits aimed at helping you further your career without worrying about years of repayment.
Some of these benefits include career support, including networking, workshops, and access to exclusive job listings, a three-month grace period following graduation, and a set minimum income threshold to ensure you only start repayment when you can afford it.
The prequalification process can be completed online and begins by asking you a few questions about your education, funding amount, and contact information. If you’re eligible, you’ll be asked to submit a final application to receive your funding.
Here’s some additional information about Stride:
- Minimum income to make payments: $40,000 per year
- Funding amount: Up to $25,000 per year
- Capped amount: 2x amount borrowed
- Minimum credit score: None
- Cosigner requirement: None
- Soft-credit check: Unknown
Edly was founded with the goal of making higher education more affordable. Its solution: an income-based product that is more flexible and accessible than a private student loan.
Some of the benefits of an Edly income-based product include no payments until you meet a minimum income threshold, a cap on the amount you owe, and $10 of your monthly payment for enrolling in automatic payments.
The application process is pretty straightforward, you’ll fill out an online quote that that won’t impact your credit score to determine your eligibility. If you’re eligible, you can submit a final application for funding. If approved, Edly will pay your school directly.
Here’s some additional information about Edly:
- Minimum income to make payments: $30,000 per year
- Funding amount: $5,000 – $15,000 per semester
- Capped amount: Earlier of 2.25x the borrowed amount or 23% APR
- Minimum credit score: None
- Cosigner requirement: None
- Soft-credit check: Yes, when prequalifying
Universities That Offer ISAs
Many universities are eager to offer ISA programs of their own in order to collect some of the income that student loan companies are now earning.
More universities add ISA programs every year, but some of the universities that currently offer income sharing agreements include:
Benefits of an ISA Loan
There are some benefits of income-sharing agreements as a method of paying for college:
- If you don’t land a good job out of school, you won’t have to pay for more than you can afford.
- Schools and lenders are incentivized to make sure they don’t loan you more than you’d reasonably be able to pay back given your field of study.
- Schools that offer ISA programs are incentivized to help you earn the highest paying jobs.
- You may end up paying less than you would pay with a traditional student loan, depending on your future income.
- Your ISA contract could expire years earlier than traditional student loan repayment.
- You don’t have to worry about student loan debt hanging over your head.
Downsides of an ISA Loan
There are also some big downsides to ISA loans that you need to know about:
- You could end up paying more with an ISA if you get a job with a high salary. However, it’s worth noting that some ISA programs cap the total cost of the agreement.
- There’s a lot more uncertainty regarding how much your loan will cost.
- Income-driven repayment plans are already an option with federal student loans, and federal loans also offer the potential for student loan forgiveness.
Bottom Line: Is an Income-Share Agreement Right for You?
Before you decide that an income-share agreement is the right way to borrow for school, you need to make sure you fully understand the pros and cons.
For many students, this will be an expensive alternative to federal student aid from the Department of Education or private loans.
However, if you plan to work for a nonprofit after school and expect only a modest salary, an ISA program might work out in your favor.
Author: Christy Rakoczy