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

Featured Stories

Filter By Categories

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.

Edmit's advice helps you to be better off after graduation.

Merit and financial aid estimates based on your student profile

Earnings estimates and financial scores for your college and major

Recommendations to save thousands on college

I'm ready

Sign up for updates

Popular Tags

Financial Aid and Scholarships* Cost of College* paying for college financial aid FAFSA grants and scholarships Student Loans* Saving for College* federal student loans college tuition 529 plan cost of attendance expected family contribution financial aid award Salary and Career* college financial planning private student loans taxes college savings plan room and board on-campus housing merit scholarships college expenses federal financial aid merit-based financial aid private universities public universities budgeting for college edmit hidden gems parent PLUS loan college costs edmit team college applications living expenses CSS profile education expenses financial need income application fees financial aid appeal off-campus housing career loan forgiveness affordable college choosing a major college majors loan repayment student loan assistance work-study application fee waivers degree programs edmit scholarship institutional aid net price SAT choosing a college in-state tuition prepaid tuition plans private scholarships repayment plans ACT budget college search college visits free tuition international students internships need-based financial aid need-blind colleges qualified higher education expenses retirement savings southern colleges standardized testing student loan debt tuition discount tuition guarantee tuition payment plans 401k UGMA UTMA applying to college college ranking systems college spending credit score discretionary income education savings accounts fees financial literacy full ride scholarship grants health insurance options investment ivy league schools liberal arts degree meal plans midwestern colleges need-aware colleges out-of-state tuition saving school-based scholarships state aid western colleges 568 presidents group Inversant MEFA asset protection allowance best price campus life college advisor college credits college deposit college transfers concurrent enrollment cost by region cost by state crowdfunding dorms early decision educational expenses esports fee waivers financial wellness for-profit universities fraternities and sororities full tuition gap year graduate school home equity loan income share agreements line of credit lists medical expenses medical school military benefits net price calculators new england colleges non-profit universities out-of-state students percent need met private college consultant small business state schools student bank accounts student organizations title IV schools travel expenses tuition decreases tuition increases tuition insurance tuition reciprocity undocumented students