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What are Income Sharing Agreements and Are They Right for Me?

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Heading into your college career the thought of thousands of dollars of student loan debt can be a burdensome feeling.


If you’re looking to avoid student loans, there’s a new way to pay for college with the help of investors instead.


An Income-Sharing Agreement, also known as an ISA, is an arrangement where an investor will pay for your college education, interest free. Then, after graduation, the former student will pay a percentage of their earnings for an agreed upon, fixed period of time.


After graduation, the student’s monthly payment to investors is calculated by their major and their current salary. The less the student earns, the less they pay. And if you don’t get a job post-graduation, you don’t pay anything.


The Benefits of ISAs


With an ISA there is no principal to pay down and no up-front cash is required. Alleviating these burdens could open the gateway for students to attend college that perhaps previously would not have been able to.


The ISA also allows students to know exactly when they’ll be done repaying their loan, 10 years later. This agreement alleviates the stress of knowing if you will be able to afford your monthly payment, since it’s tied to your income.


You’re likely to pay back more than you borrowed, as you would with a traditional interest-bearing loan, but there is a built-in protection so you don’t get in over your head. Most ISA’s also have a minimum income requirement so, for example, if you’re working and only earning minimum wage, you won’t have to pay either.


There is a slim chance you’ll also pay back less than you borrowed, if you hit the end of your repayment term and your income was low enough throughout the period.


The Potential Drawbacks of ISAs


Simply put - if you do very well financially, you’ll pay more. In a sense “you’re betting against yourself,” financial expert and best-selling author Nicole Lapin told Good Morning America. “You’re saying, I’m going to be underemployed or unemployed. I’m not going to be able to make these student loan repayments.”

If you end up making more than you predicted, you could have to pay for up to 2.5 times the loan amount, which you can consider interest.


Since ISA’s for college students are still a relatively new arrangement, there is concern about issues that perhaps have not arose yet. There’s also no strong laws that govern these ISA’s, which could put the student at risk.


So how does an ISA actually work?


For example, let’s say a student takes an ISA loan out for $10,000. Then, post graduation they earn $50,000 a year in salary at their job. If the term of the ISA is 10 years and they have to pay back 7% a year, that means during year one the student will pay back $3,500.


If the following year, the student gets a raise to $55,000, they’ll owe $3,850 that year. Let’s say three years later, they get another raise to $60,000 -- the student will owe $4,200 going forward.



Year

Salary

Interest

Calculated Payment

Year 1

$50,000

7%

$3,500

Year 2

$55,000

7%

$3,850

Year 3

$55,000

7%

$3,850

Year 4

$55,000

7%

$3,850

Year 5

$60,000

7%

$4,200

Year 6

$60,000

7%

$4,200

Year 7

$60,000

7%

$4,200

Year 8

$60,000

7%

$4,200

Year 9

$60,000

7%

$4,200

Year 10

$60,000

7%

$4,200


This payback schedule adds up to $40,250 over 10 years. But luckily, since most cap payments at 2.5 times the loan, you’d only pay back $25,000 - stopping payments when you hit that threshold during the seventh year.


How do I get an ISA?


More and more colleges are actually offering ISAs to their students.


For example, Purdue University has an ISA as an option for financial aid. There is limited funding for this program, and it is only offered to sophomores, juniors and seniors. Students can apply online. On its website, Purdue writes that it’s offering ISAs as an option to possibly reduce debt for its students.


Other schools are slowly rolling out ISAs, such as Messiah College in Pennsylvania, but overall it is still a new offering. This article profiles Purdue and Messiah as well as three other colleges offering ISAs.


Is an ISA right for me?


An ISA is still like a loan in that you’ll owe money back to the lender. Be sure you still apply for financial aid, so you can get as much ‘free money’ as you can first.


If you’re considering an ISA, be sure to do some research into the expected salary of your desired career path to see what your payments would be. Compare your expected payments with what you’d pay on a federal loan, since those loans can have more flexible repayment terms, or on a private loan.

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