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How income share agreements work
Could this financing based on how much you make be a good alternative to student loans?
It’s been consider an alternative to student loans and comes with repayments based on how much you make. You won’t have to worry about interest, fees or even paying back the total amount you owe.
Students in high-earning fields might want to stay away, however — this option could actually turn out to be more expensive than a student loan.
What exactly is an income share agreement?
An ISA is an alternative form of financing through which a lender gives a borrower money in exchange for a percentage of that borrower’s future income over a fixed time. Typically, borrowers pay up to 10% of their income over five or 10 years. That’s it.
Economist Milton Friedman first proposed the idea in 1955 as a way of investing in individuals — he called it a “human capital contract.” ISAs saw a brief moment in the spotlight around 2014 and 2015, when members of Congress introduced a bipartisan bill intended to expand and regulate these agreements. But they remain relatively uncommon in the US.
ISAs vs. loans
Unlike with a traditional loan loan, you won’t necessarily repay the amount you borrow. This is because how much you repay is tied to your future salary, if you earn less, you could end up paying less. But you could end up paying much more than you would have with a personal loan. For this reason, ISAs are generally a better deal for borrowers that work or intend to work in low-paying industries or positions.
Why are ISAs considered an alternative to student loans?
If you’ve heard of ISAs, you’ve probably heard it in the context of student loans. In fact, most ISAs out there are only for student borrowers. Some universities like Purdue University have even started to offer ISAs as an alternative to private or Parent PLUS student loans.
ISAs are particularly attractive to students who aren’t sure how soon they’ll get a job after leaving school, let alone earn enough money to afford their repayment plans. Federal loans come with income-based repayment plans that are actually quite similar to an ISA: Your loan is forgiven after 20 to 25 years of paying a percentage of your income. Private student loans, however, tend to come with a standard repayment plan and can be a huge risk for students who don’t have a well-paying job lined up when they graduate.
Where can I get an ISA?
Only a handful of providers offer ISAs in the US — even fewer if you aren’t looking for student loan financing. Start with the lenders below when exploring whether an ISA is an option for you.
Align is one of the rare providers offering ISAs as an alternative to personal loans. Through Align, you can borrow up to $12,500 and pay it back over two to six years at up to 10% of your income. Align also offers a buyout plan for borrowers who unexpectedly get a higher-paying job, which it approves by case.
Align isn’t for everyone, however. It operates in only Illinois, New Mexico, Utah, Montana and Delaware. You’ll also need a credit score of 600, work at least 35 hours a week and earn at least $22,000 a year to qualify.
Lumni was among the first ISA providers in the US, opening its doors in 2009. Like many other companies, it offers ISAs as an alternative to student loans — not personal loans.
Getting an ISA from Lumni is a more rigorous than applying for other types of financing. First, you complete an application, followed by an admissions test and financial simulation before you can even get an offer.
Because its application process is so in-depth, Lumni doesn’t advertise rates or terms the way other lenders might. It’s all based on your circumstances and Lumni’s estimate on your potential. One of Lumni’s biggest draws is its help with getting you started in your career — after all, it’s literally invested in your success.
(Possibly) your school
More and more schools are offering ISAs, thanks in part to companies like Vemo Education that make it a lot easier. Talk to your school’s financial aid office to see if it’s an option — or make it known that you’d be interested in an ISA in the future.
Purdue University is a leading academic institution offering ISAs to its students — but yours might start offering it soon as well. Companies like 13th Avenue Funding and Goal Structured Solutions work with educational institutions to build in-house ISA programs.
Purdue’s program — called Back a Boiler — works a lot like a student loan and is offered to students who don’t have federal options other than a Parent PLUS loan. You can qualify for up to your total cost of attendance after other types of financial aid.
Like a federal loan, students get a six-month grace period before repayments start. However, they make only 10 years of repayments, compared to the 20 or 25 years you’d have to pay through an income-based repayment plan before your federal loans are forgiven.
How much do ISAs cost?
How much your ISA costs depends on several factors:
- How much you borrow.
- How much you earn.
- The percentage of your income you repay.
- How long you’re making repayments.
If you’re borrowing to pay for school, your lender might consider your academic major and work experience, rather than your income when coming up with your costs. Some ISAs also come with a payment cap, depending on your income, loan amount and term.
Keep in mind that ISAs are based on your income before taxes, so you’ll pay a larger percentage of your take-home income than you might expect.
Here’s an example of how much an ISA could cost you:
|Amount borrowed||Income percentage||Term||Starting income, expecting a 3.8% annual income increase||Monthly payments||How much you pay||Cost or savings|
|$5,000||1.5%||2 years||$25,000||Starting at $31.25||$764.5|
|$10,000||5%||5 years||$30,000||Starting at $125||$8,092.08|
|$20,000||10%||10 years||$50,000||Starting at $416.67||$59,476.73|
|$40,000||2%||10 years||$100,000||Starting at $166.67||$23,790.69|
As you can see, ISAs can save you money on your tuition if you play your cards right. But they can cost you more than double the amount you borrow if you aren’t careful. That’s why it’s highly important to estimate how much your ISA costs.
How could I benefit from an ISA?
- Works around your life. If you aren’t sure about your career path or plan to take time off to travel or raise a child, you’re less likely to risk ruining your credit score by taking out this type of loan.
- Potential savings. You can sometimes repay less than you borrow through an ISA, depending on your salary and terms.
- Payments based on income. You won’t risk high repayments you can’t afford each month, given they’re tied to how much you earn.
- Payment caps and buyout options. Align and similar lenders offer an option to buy off your ISA in one lump sum if your salary suddenly jumps to another tax bracket. Others won’t let you pay more than a specified percentage of the amount you borrow.
Drawbacks of ISAs
- Potentially expensive. If you land a high-paying job unexpectedly, you could end up paying more than double the amount you borrowed if your percentage is high.
- Not always affordable. When money gets tight and there’s nothing to spare, paying even 2% of your pretax income can be an unaffordable cost.
- Little regulation. While ISAs come up in Congress periodically, there’s still little regulation as to how lenders come up with their rates. Think tank New America even speculates that lenders could potentially start charging minorities and women higher rates, because as a demographic, they tend to take on lower-paying jobs or face wage discrimination.
- Lots of paperwork. You’ll have to regularly prove your income to your ISA provider, whereas you do this only once with personal loans.
- Companies don’t always stick around. Back in the ISA heyday, around 2014, borrowers could choose from a handful of providers for both personal and education ISAs. Several — including Upstart and CommonBond — no longer offer ISAs, while other companies simply don’t exist today.
5 alternatives to income share agreements
- Credit union loans. These nonprofit financial institutions typically offer loans in smaller amounts to members, with fewer strict income or credit requirements than banks and other for-profit lenders.
- Secured loans. Backing your loan with collateral can get you more favorable rates and terms on a personal loan — which often translate into affordable repayments and costs.
- Crowdfunding. Not sure you can afford any type of loan repayments? Consider starting a campaign on a crowdfunding platform like Kickstarter or GoFundMe to raise funds from your social network.
- Family and friends. If you don’t need much money, you might be able to borrow from loved ones rather than go to a traditional lender. You can draw up terms and conditions similar to an income-share agreement. Services like LoanWell offer agreements and autopayment options to make borrowing from friends and family more official — though you might want to consult a lawyer before signing anything.
- Private student loans. Private student loans may be your only other financing option after you’ve maxed out other types of financial aid. Look for a lender that allows for cosigners and offers income-based repayment plans or several forbearance options.
Compare private student loans
Income share agreements aren’t for everyone, and they can be difficult to find. But students and those with unpredictable career paths — like journalists or artists — might benefit most from an ISA’s income-based payments. Doctors, lawyers and other high-paying professions with cut-and-dried career tracks might end up paying more for an ISA than they would with a personal loan.
Learn more in our comprehensive guide to student loans about how borrowing works, what to expect and other lending alternatives.
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