As I was sitting in my apartment reviewing my monumental amount of student loan debt, I began thinking that there is no way that this is the most efficient way to fund students for school. So I began doing research, and stumbled across an interesting concept called Income Share Agreements that are beginning to be implemented by universities to help students cover some of the steep tuition rates that plague our higher education system today.
An Income Share Agreement (ISA) is an alternative way of paying for college offered by some universities. The main concept is that you pay a particular percentage of your income for a specified number of years after you graduate. These numbers are varied based on the amount of initial funding received and projected income after graduation.
How Does An Income Share Agreement Work?
As stated above, an Income Share Agreement is an agreement to pay a percentage of your income over a defined number of years.
This is a contract made through your university, and particular plans differ between universities. In general, these plans require a maximum of 15% of your annual income for up to 10 years, which are set amounts for the entirety of the contract. The amounts are determined up-front based on your major and projected post-grad salary.
The more you make, the more you pay.
Student’s payments can be paused for up to 5 years depending on their plans for after college, and will start once they are making a defined annual amount. These payments are capped at 2.5 times the initial funding amount.
Purdue University, one of the leading universities on this concept has a great tool available to get an estimate on your Income Share Agreement called a comparison tool.
ISA’s can be tremendously beneficial for students, but since this a relatively fresh concept that universities are just beginning to dabble in, there are still issues that need to be smoothed out.
How is an ISA Different From a Loan?
An Income Share Agreement is pretty similar to a loan, where you borrow money and have to pay back it back later on.
With an ISA, you are paying a percentage of your income for a fixed number of years, or until you pay back 2.5 times the initial amount borrowed with no interest.
A traditional student loan also involves borrowing money, however there is a set interest rate on your amount borrowed. This means you could be paying off your loans indefinitely depending on how much you opt to pay month to month.
The other major difference is that ISA’s are funded through your university, while loans are typically funded through the government.
As a result, people paying off long-term ISA’s may resent donating money back to their university after being bound to a contract like that, which could significantly impact the alumni associations at these universities.
What Are The Benefits Of An ISA?
Student loan debt and the excessive cost of going to college is arguable the hottest debate surrounding higher education right now. It is exactly the reason why people are forced to drop out from pursuing something they want to do, and what has fueled the fiery debate about whether or not getting a degree is even worth it.
Since so many people struggle to find the money to pay for college, people will accept this new payment method that doesn’t involve taking out a loan.
ISA’s provide a solid alternative if your loans don’t cover enough of the tuition rates, or if you don’t qualify for a loan at all. In general, this agreement will only be enough to pay a portion of your tuition.
However, when paired with other methods of payment it can be exactly what some people need to complete their degree and find a good job. It comes with the peace of mind of knowing exactly how long it will take to pay off.
This concept provides incentive for universities to invest more time and money in their career development departments for students since the return on the contract agreement is directly linked to the student’s financial success.
One other thought is that if Income Share Agreements become a major movement among higher education and is proven to be a consistent source of income for universities, then it could effectively lower tuition rates. It’s difficult to speculate on the overall ripple effect that a movement like this would create if it were to catch on.
Drawbacks of an ISA
Essentially, by signing an Income Share Agreement, a student is asserting that they will find a quality job after college within their given major.
For some particular majors, this can be difficult to do as many students coming out of college have a hard time finding work in their field.
Your contract details are based around your major and projected salary. For example, if you pick a major resulting in a higher projected salary, such as Engineering, your pay-back percentage rate is lower. For someone with a lower projected salary, such as an Art major, the percentage rate would be higher.
This is done in order to make the total dollar amount owed back relatively equal. Someone with a $60,000 salary at 5% per year will be paying back the same amount as someone making $30,000 at the rate of 10% per year. This seems unfair to some, and could ultimately result in various problems.
Some majors have a vast variety of career paths at their disposal. For example, at my particular university, there was a general major called Health Science. This encompassed everyone from pre-physical therapy, nursing, pre-professional, healthcare management, and just about anything else health related.
Everyone in this program had the same undergraduate degree, yet their post-grad lives and salaries vary drastically. The salary of someone in health promotion would be significantly less than someone in physical therapy despite receiving the same bachelor’s degree.
So they both would be paying the same percentage of their income which completely desincentivizes the PT student from utilizing the ISA program because of how much more money he or she would owe their university.
Knowing this, it is very important to read the fine print of your contract before signing an ISA. You don’t want to end up paying ridiculous sums of money when you land a high paying job out of college.
These agreements are not for everyone, and still have a lot of tweaking and adjusting to do before this catches on as a viable way to pay for college on a broader scale.
ISA’s can certainly be beneficial for students that really need a way to pay for college outside of loans. Of course, there are also the traditional methods of receiving scholarships or joining the military.
Students must be wary of their contract details. Income Share Agreements are not for everyone. They could end up costing more than taking out a traditional loan if you’re not careful.
I would still consider this concept to be in its infancy stage. There are still plenty of problems with ISA’s.
Despite the existing issues, I could see this growing into a feasible funding source for financially-struggling students. Some people need that extra push to achieve their diploma, and ultimately live a life of financial stability.