Rising higher education costs are prompting students to take on more student loan debt than ever before. According to the National Center for Education Statistics, the average annual cost for tuition and fees at a four-year public institution is $9,400. The average student who graduated in 2019 borrowed $29,900 in private and federal student loans to cover their educational costs. To reduce their student loan burden after graduation, some students are exploring alternative funding solutions to pay for school, including income-sharing agreements.
What is an income-sharing agreement?
Under an income-sharing agreement (ISA), you receive funds to cover your educational costs in exchange for a commitment to pay a percentage of your future career earnings after you graduate, typically for a repayment period of up to 10 years. ISAs are offered by third-party providers that might work directly with students or in partnership with your school. Since this aid alternative isn’t technically a student loan or another credit-based product, ISAs are unregulated and agreement details vary between ISA providers.
Generally, your agreement terms will state an income share percentage based on your gross income. Payments at this percentage kick in once you’ve reached the income threshold. Stated in your agreement, the threshold is the minimum you need to be earning to initiate repayments. If you don’t meet the threshold, your payment term might be extended to compensate for the repayment delay. Assuming your earnings meet the income threshold, you’ll start making payments throughout the predetermined term on your agreement. Another way to fulfill your ISA is by reaching your ISA payment cap, which is the maximum repayment amount that’s stated on your contract.
Pros and cons of income-sharing agreements
Although ISAs might sound like a simple solution to student debt, you’ll need to weigh the rewards with the risks. Here are the pros and cons of ISAs.
Pros of an ISA
- Fills gaps in financial aid. If you’ve maxed out the federal student loans you’re eligible for, ISAs can help you stay on track. This might be helpful if you’re short on funds but are ineligible for private loans.
- No credit requirement. Private student loan lenders determine your eligibility and terms based on your past credit history. ISA providers aren’t lenders, and ISAs aren’t technically loans. ISA underwriting criteria are based on your degree program, career path, and future earning potential.
- No interest accrual. Since there’s no interest with an ISA, interest charges don’t accrue on the amount funded by the ISA provider.
- No payments if you lose your job. Whether you suddenly lose your job or fall below your ISA income threshold, you aren’t required to make payments until your earnings bounce back to the minimum threshold.
Cons of an ISA
- Higher payments for high earners. Since your payment amount is proportionate to your income, the more you earn, the higher your payments will be. Higher payments can take a considerable chunk out of your monthly budget.
- High (or no) payment caps. ISAs are so varied that some enact high payment caps before your agreement is considered fulfilled. For example, let’s say an ISA funded $40,000 toward your education with a share percentage of 7% over 10 years and a payment cap of $80,000. If your gross annual earnings are $110,000, you’ll pay back $77,000 over the 10-year term without the payment cap alleviating you of your contract. Some providers don’t even include one at all.
- Total cost is ambiguous. How much you’ll earn throughout the first 10 years of your career is unclear. You might earn more than you anticipated when first signing the ISA contract, locking yourself into a higher overall cost than a student loan.
- ISAs aren’t regulated. The newness of ISAs has raised concerns about regulations and policies. Gray areas regarding regulations protecting students, legal enforcement, and taxation make practices surrounding ISAs questionable.
Is an income-sharing agreement right for you?
Income-sharing agreements aren’t a wise option for everyone. It might make sense if you don’t expect to be a high-income earner or if you’ve hit your federal student loan limit and are pursuing a career in the private sector. However, working in the public sector might qualify you for state and federal loan forgiveness programs that can discharge a portion (or all) of your student loan debt once you’ve worked a certain number of years in your given field.
Ultimately, your chosen career and potential future earnings are two of the most important factors to weigh when deciding how to fund your education. Before signing an ISA, use a student loan interest calculator to see how much an equivalent student loan will cost. Compare this amount to the cost of an ISA based on the average income in your desired profession to see which one might be more advantageous for you.
Make it easier to determine if you need an ISA by applying to scholarships you’re eligible for! Our Scholarship Search tool can help you find them.