Students looking to fund their education are often fairly familiar with the various options available to them, such as federal Pell Grants, federal and private student loans, IRAs, and other resources. Many students and their parents, however, are unaware of another option, called the income-share agreement, or ISA.
An ISA is a fairly new option being made available to students who need educational funds. In return for the money, students agree to pay a fixed percentage of their income over a fixed number of years. A recent survey performed by the American Enterprise Institute found that most students and parents were not even aware ISAs existed—but it turns out that for some students, the ISA is a better option than student loans.
In a student loan, borrowers agree to pay back a set amount per month, which includes both principal and interest. If the student is underemployed after graduation, or cannot find a job at all, the amount does not change—meaning the student must then make arrangements with their loan provider or servicer to ensure they stay out of default.
With an ISA, the student agrees to pay a percentage of their income, which means that an underemployed borrower with an ISA will pay less than one with a student loan. Those who have no income after graduation make no payments. The other side of that, however, is that if the student receives high-paying employment, the percentage still applies—meaning they could end up paying more overall than they would have with a student loan.
The idea of income-based repayment plans isn’t new. The federal government already offers it—with a catch. If a borrower takes out an income-based repayment loan, they are limited to borrowing only $5,500; anything over that amount has to come from another source. This means that many students find the income-based repayment unfulfilling in terms of meeting their total financial need. ISAs offer a way to keep the income-based payments but also borrow the larger amounts of money needed to finance their education.
The AEI survey found that once the ISA concept was explained to students and parents, a full third of them preferred the idea of an ISA over a traditional student loan. Parents seemed far more wary about the idea than students, who were excited about the income-based repayment possibilities and appreciated the insurance, so to speak, of not having to make payments if they were not able to find employment.
ISAs are only available through a few organizations; 13th Avenue Funding, Base Human Capital, and Education Equity are a few of the companies offering ISAs at this time. The potential they offer, however, has not gone unnoticed by lawmakers. In Oregon, a proposal called “Pay It Forward” was introduced in 2015—but was squashed by the Oregon House of Representatives, which said it needed more work before it would pass.
While ISAs are still a new concept, the possibility remains for them to offer yet another alternative to students seeking funds for education. With time and continued evolution, they could become far more available in the future.