Income-Sharing Agreements: Studying the Pros and Cons
Income-sharing agreements, or ISAs, are controversial new offerings for students worried about their loan situation. The idea behind an ISA is that you go to college first, get your education, and outlay no upfront expenditures.
However, critics claim there is a dark side to ISAs that make them a less desirable, or at least equally burdensome, option as traditional student loans. What’s the truth? In the following article, we’ll be looking at the benefits and drawbacks of an ISA. Before that, let’s take a look at how they operate.
How an ISA Works
An ISA works simply on paper. An investor or investors will get together with a specific educational institution and agree to foot the full bill or at least the tuition of a student who is pursuing a major. Once that student has gotten through the program and landed a regular income in their career field (presumably), they would begin paying back the cost of their education through a small percentage of income.
You may already be thinking of all the ways this can go wrong. And, in fact, their are disadvantages we’ll be discussing later in the article. For now, however, let’s look at why you may want to do it.
Reaping the Benefits
There certainly are benefits to the ISA setup. And it can be easy to fall into the idea that income-sharing is the best option for you once you get a look at what they are. Hold judgment until the end, though.
1. They Require No Upfront Capital
Some of the hardest things about going the student loan route are keeping up with the various loan types, deciding whether to consolidate/not consolidate, and keeping the payments going if you have trouble finding a job after college is done.
Furthermore, your loans are accruing interest the entire time that you’re struggling to make ends meet and afford the cost of books, room, meals, etc. With an ISA, you can just start attending school and not even think about the cost until you’re out and gainfully employed. No pressure means focusing more on your studies and performance.
2. There Are Few Barriers to Entry
You do not have to be rich or poor to take advantage of ISAs where they’re available. Where financial assistance for traditional funding loans is handled via family income and applying by deadlines, ISAs are there based simply on availability and your desire to enroll in a program that supports them.
3. ISAs Tie Directly to Regular Income
Yes, you will have to pay a percentage of your regular income to paying off an ISA agreement, and that could take some time to pay in full. But here’s the great part. The keywords are “regular income.” If you fall into a difficult job market, you don’t have to pay a dime. Once the job situation clears up, you would just pick up paying where you left off. No credit damages, no exorbitant ongoing costs.
4. They Force Schools to Put Their Money Where Their Mouths Are
Schools know that by accepting an ISA agreement at their institution, they’d better be able to deliver the goods. Without managing to, investors would not front the money and the school would be out the funding necessary to continue their programs. So, when a school starts an ISA program, they have extra incentive to make sure their graduates find work in the fields of their choosing.
5. You Could End Up Paying Less for Tuition
Depending on where you end up and how much you are making, you could end up paying off your tuition much, much faster. That’s because it has less time to accrue interest. Of course, that’s ultimately up to you and how much extra of your income that you decide to pay. But if you get an agreement of 2 percent of your income, for example, you could pretty easily bump that up to 4 percent total and pay it off in half the time.
What an ISA Hinges On
Being eligible for an ISA is not as cut-and-dry as it seems on paper, admittedly. And there are certain limitations before we even begin to get into the disadvantages. That’s probably why some in Congress have targeted it as a predatory practice. Let’s look at the things that an ISA hinges on for better clarity.
Your Chosen Degree Path
ISAs are built on the idea of return on investment (ROI). An investor in your education is going to want some return on their money. That means they’re unlikely to fund degree paths that have a lower likelihood of high pay or gainful employment of any kind. Of course, no one wants to spend a bunch of tuition money and time getting a degree leading to a job that won’t take care of them, so there isn’t much surprising about this.
Percentage of Pay
The pay percentage can vary wildly depending on the terms of the agreement, and truthfully, not a lot favors you in the early stages. That’s why you can see some agreements run as high as 17 percent of future income. If you’re considering an ISA, you just need to make your peace with the fact that there will be some form of give-and-take.
Only a handful of universities are currently accepting of ISAs, but the Trump Administration has favored their practice. As a result, you can probably expect greater adoption of programs, particularly if the 2020 election favors the incumbent. For now, though, your options will be few based on where these programs are actually available.
Would you rather pay now or later? Do you like the idea of only paying while you’re employed, or would you like to have greater certainty of loan terms and when it will all be paid off? Figure out what you’re the most comfortable with before making your decision.
And Now the Disadvantages
With every benefit, there’s usually a drawback, like two sides of the same coin. Income-sharing agreements are not special in this regard. Here are some of the ones that’ll keep you from jumping into such an agreement feet-first.
1. ISAs Are Not Yet As Readily Available
Limited availability from schools and degree paths will make it difficult to get the setup you’re probably hoping for. Again, this could change in the years ahead. For now, you’ll want to inquire with the colleges to which you’re applying and ask a) if they have ISAs set up, and b) if there are limitations on what you can major in when pursuing one.
2. They Can Take Longer to Pay Off
Being tied to your regular income means that you won’t have to go through the constant uncertainty of how you’re going to make a payment if you lose your job. That said, the amount you owe is still out there waiting to be repaid until you can resume, and that can lead to a longer payoff period than your traditional student loan situation. If you’re the type of person who doesn’t like to have debt hanging over your head, this could become problematic.
3. They Could Be Somewhat Limiting in Application
Look for ISAs to be a popular choice for in-demand professions. Think computer science, medical, engineering. For arts-based endeavors, they may not be. Things are still up in the air to some degree, but you’ll ultimately need to choose a major that an investor believes he or she will get their money back on.
4. ISAs Are Experimental in Nature
Experimentation isn’t necessarily a bad thing. But so little is known about how viable these plans are that it’s conceivable they could vanish as soon as they appear. Where will that leave you in your educational endeavors? Good question. And it’s one you should probably have clearer answers to before pursuing this path.
5. They Could Target Disadvantaged Groups of Students
ISAs do not see or respect economic disadvantages. If you come from a disadvantaged household, you pay the same as someone from a more well-to-do area. Beyond that, as you start to repay the ISA, it can start to feel like indentured servitude.
Income-Sharing Agreements Are Not for Everyone
While income-sharing agreements are not for everyone, they do have enough economic advantages to be worth considering. But the truth is, we have very little data at our fingertips to tell us how they stack up to student loans. Proceed with caution if you’re considering this route, and best of luck to you!
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