Are Income Share Agreements a Better Student Loan?
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If you want to attend a university, college, or trade school but are worried about the financial burden of taking out a student loan, you might want to look into an income share agreement or ISA.
It's not surprising if you've never heard of an ISA. They are virtually unknown in some parts of the country.
But if you're looking for an alternative to student loans, an income share agreement may be a viable option. Still, there's a lot to know before you decide.
What is an Income Share Agreement (ISA)?
An ISA is a particular type of student loan that allows you to borrow money for college and then repay it based on a future projected salary estimate.
Despite the fact most ISA providers are marketing their financial products to loan borrowers as a substitute for student loans, the Consumer Financial Protection Bureau (CFPB) determined they are, in fact, student loans.
They're just different from the typical one many students apply for at the beginning of their higher education.
Income-sharing agreements carry some risk, like any debt, and should only be considered after you've exhausted all other undergraduate federal loans, Pell grants, or other funding opportunities.
Make sure you also check out any traditional private student loans you qualify for before deciding on which agreement to enter with an ISA provider.
And make a thorough comparison of all offers and terms before making a final decision.
How Do ISAs Work?
Essentially, this is a type of profit sharing arrangement. It's an agreement in which the type of student loan you receive goes toward assisting with the cost of your education or training based on the expectation of you earning a salary that will enable your repayment of the loan.
A loan from an ISA lender is the same as a loan from any other lender.
As a result of taking on the debt, you agree to pay back the agreement provider a fixed percentage of your income for a predetermined period after completing your college education or training.
Typically this is for an agreed-upon time or a set number of payments.
In some cases, you may end up paying more or less than the amount you received to pay for your college cost.
ISA programs gained popularity in recent years, despite being relatively uncommon as a form of college financing compared to other student loans.
Benefits and Drawbacks to ISAs
When compared with traditional student loans, income share agreements have several advantages. They're often used in conjunction with other forms of financial aid, such as grants, scholarships, or traditional student loans.
Because they don't have interest rates on the amount of money you'll have to pay back, they may be a better option than student loans with variable interest rates, which can be more expensive.
Long-term financial planning is possible because the payment period is usually defined and limited. Still, the monthly payments can be difficult to estimate if your future salary is unknown when taking on the ISA.
Like income-driven repayment plans on federal student loans, ISAs payments require you to earn a paycheck.
While payments could be suspended if you're earning less than the minimum income threshold for your job, federal loans may offer public service loan forgiveness options if you're working with a qualifying employer or have a high debt-to-income ratio due to a low salary.
ISAs have some disadvantages too.
A higher-paying job may necessitate a higher percentage of your salary in the form of a monthly payment.
In addition, only a few educational institutions usually offer income-sharing agreements, and they may also restrict ISA services to students in specific majors or those who meet other requirements.
Some fifty colleges, including Northeastern University, Purdue University, and The University of Utah, currently offer their income share agreement programs.
Still, most college ISA programs are specifically for their students. Many schools offering ISAs to students have a comparison tool for exploring different loan options.
On the other hand, private lenders like Stride Funding offer income share agreements accepted by most other colleges and universities.
Do your homework and be extremely careful when utilizing a private financing company for an ISA, as some have been found to have unfair rates for low-income students or other deceptive practices around these private education loans.
Is an ISA Listed on a Credit Report?
An approved private student loan almost always necessitates the presence of a cosigner or a minimum credit score.
People with poor credit scores (or a lack of credit history) or those who've spent all their savings on college might benefit from income share agreements because they don't typically have the requirements of traditional loans.
However, a credit report will show an income sharing arrangement because the Consumer Financial Protection Bureau ruled that they are indeed credit products.
Do ISAs Provide any Tax Benefits?
Under current US tax law, it's not possible to deduct ISA payments in the same way that interest on some student loans is deductible because the income generated by an ISA is deemed taxable by investors.
(Some canceled student loans are not taxable, as is the case with canceled income sharing agreements.)
Contrast this with tax deductions for those who have taken out a private or federal student loan and meet specific income requirements allowing them to deduct up to $2,500 in loan interest from their yearly taxes.
That isn't possible with an income sharing arrangement (ISA) because they don't typically charge loan interest rates.
Can You Get Out of an ISA?
Be sure you understand the terms of an income-sharing arrangement thoroughly before signing on the dotted line, as it could affect your financial future.
Once you start earning a salary in a high-paying profession, you may find it difficult to accept the payment terms that would make a significant dent in your monthly salary.
Like traditional student loans, which also have a set repayment schedule, these repayment options are contractually obligated to the borrower.
Still, as with other student loans, there are usually provisions that allow for pausing of payments if a college graduate's monthly income falls below a certain amount or if there are other reasons why payments cannot be made.
There are ways to remove yourself from an income share agreement, although they may be more restrictive than regular student loans.
Of course, the main way to end an ISA is to complete your required payments.
Your ISA will also terminate early if the full dollar amount of payments reaches the payment cap, which is set in place to protect higher earners from having to pay too much.
An ISA will also end if the repayment period ends. The total time required for making payments terminates when the payment window ends, regardless of how much was paid.
Like other forms of debt, ISAs might be more easily discharged than typical student loans if the borrower declares bankruptcy.
But provisions are preventing this from happening under many circumstances, so you shouldn't enter into an ISA expecting to file bankruptcy at any time.
Additionally, the growing trend in bankruptcy law is to make it more difficult to discharge student debt from loans of any kind in a bankruptcy, so this is subject to change in the future.
When to Consider an Income Sharing Arrangement
If you've been denied scholarships, can't find a student loan with a payment plan and terms you find acceptable, and have exhausted all other funding options, an ISA may be a viable option.
In several cases, joining an ISA is advantageous, but there are some exceptions, such as those planning to go into high-earning careers, which will mean higher monthly payments.
In general, there are a couple of scenarios in which an income sharing agreement should be considered over traditional student loans.
ISAs are the most advantageous if you want to completely avoid student loan debt due to low credit scores or are considering going into a low-paying field.
Taking out a student loan for a career path that pays lower than some others, such as teaching or social work, the Peace Corps, or a ministry position, will allow you to keep your ISA payments low, and your obligation will be fulfilled to the lender after a set specific period.
This is often preferable to taking out a student loan, where an annual percentage rate (APR) might cause your obligation to grow over time to the point where you can no longer make monthly payments.
Time to Choose
Without access to funding options such as federal student loans, grants, military benefits, low-interest private loans, or other forms of education funding, you might consider an income-sharing agreement.
However, even if your school gives you the option to utilize an ISA, make sure you find the one with the best terms for your future aspirations.
Remember, the contract terms and income share percentage of an ISA are usually fixed and based on estimates of future income after graduation.
Something that takes 10% of your pay from your future salary cannot be switched out for something that will only take 5%.
One should also remember that, while it's possible to pause payments on an ISA or have it discharged entirely, these options are few and far between.
And one must often meet a specific set of hardship criteria before a bankruptcy discharge of the debt will be allowed.
Any loan or agreement and the repayment terms you enter into should be mutually beneficial, not take too much of your future salary, and allow you to complete your education without significant financial strain in the future. Choose carefully.
Written by Women Who Money Cofounders Vicki Cook and Amy Blacklock.
Amy and Vicki are the coauthors of Estate Planning 101, From Avoiding Probate and Assessing Assets to Establishing Directives and Understanding Taxes, Your Essential Primer to Estate Planning, from Adams Media.