The True Cost of Income Sharing Agreements (ISAs)

https://pixabay.com/en/money-dollar-finances-1974695/

We often make decisions based upon whether our bank accounts are impacted positively or negatively. So it’s no secret that when it comes to prices, a “good deal” often comes with some strings attached.

Coding bootcamps have caught on to the trend, and their latest pitch is income sharing agreements, or ISAs. But it’s important to consider what that really means. To put it simply, an income-share agreement, or ISA, is a tuition financing model where students agree to pay a percentage of their salary to the coding bootcamp or ISA provider for a specific amount of time after completing their program and landing a job — rather than paying tuition up front. The salary percentage students are required to pay back usually ranges anywhere from 8 to 25 percent, according to Course Report, and often takes between one to four years.

Money You Could Lose with an ISA

There’s plenty of hype behind income-share agreements, but the model is still far from a guaranteed success. Agreeing to an ISA could mean that you end up paying a lot more money for your coding education than if you had paid up front.

The average up-front tuition amount for coding bootcamps is $10,000 to $15,000, according to Course Report, which collects data and reviews on coding bootcamps. The idea to not pay thousands of dollars at the start of the program may be attractive. But, let’s say you agree to an ISA. And after completing the a coding bootcamp, you’re hired with a salary of $60,000 a year. If you pay 20 percent of your salary for four years, you’ll end up paying $48,000. That’s more than four times the average cost for an up-front payment to a coding bootcamp.

Some coding bootcamps, including Thinkful, require you to pay your ISA as soon as you are making $40,000 a year. They’ll tell you at $40,000 a year, your monthly ISA payments will be lower than they would have been if you had taken out a loan. As soon as you start making $60,000 or more a year, because your ISA payments are based on a percentage, you will end up paying a great deal more than if you had taken out a loan. In Thinkful’s case, an ISA is really only a good option if you don’t plan on making more than $60,000 a year. Considering the future location of your job — e.g. San Francisco, New York City, Seattle, etc. — making less than $60,000 a year may not be sustainable.

Something else to consider: making your ISA payments may provide difficulties in taking care of other life necessities such as rent, car payments, food or other bills. For those planning to freelance or start a business shortly after completing a bootcamp, income-based payment plans may not be the best option.

There are still some benefits to an ISA program, however, depending on a student’s individual circumstance. For students who take time off work to attend graduate school, care for a loved one, start a family, or are struggling to find employment, the interest won’t keep growing the same way a traditional loan would. That flexibility could potentially help low-income students gain access to an education they might not otherwise be able to afford up-front.

A False Sense of Risk

Other concerns remain. For instance, coding bootcamps that use ISAs give the impression that they take on more risk than a traditional lender or education provider because they don’t make any money until the student does. But, that premise is misleading.

Bootcamps with ISA programs typically expect that some students will drop out. That’s why their up-front tuition cost is less than the cost of an ISA. For example, if a bootcamp’s ISA cost is three times their up-front tuition rate, they may be expecting some students will drop out so they charge extra to make up for the money lost on the students that may drop out.

In other words, if a student makes it through a coding course successfully and finds a job, he or she ends up paying tuition for two students that couldn’t get a job after the course.

For example, Turing states in their ISA that as soon as you start making more than $75,000, a percentage of your payments start funding future students. So, you’re actually paying for other people’s education.

Also, some ISA providers and bootcamps may not restrict the type of job or field that students can get hired in before they must pay back the ISA. So, in this case, even if the bootcamp experience fails you, or if you end up not wanting a career in tech, you will still have to pay the ISA. It’s important that you go over this specific detail when discussing an ISA with a bootcamp.

Understanding the ISA Multiplier Model

Considering that ISAs are somewhat new in the coding bootcamp space, they are not federally regulated. This means that there are no specific guidelines that schools have to follow with their ISAs. That is why every school varies in their agreements.

That’s also why certain schools, like Lambda, are constantly testing and changing their agreement; because they are still trying to refine their ISA model.

Some coding bootcamps that offer ISAs are testing the multiplier model. This means that they add a multiplier each time you opt-in to using additional services such as housing or career finding services. Sometimes, these coding bootcamps, like Lambda, have advertised free housing along with covering computer costs, when they are actually adding those costs to your ISA.

Here’s is an example of a coding bootcamp that has a 3x multiplier base: Imagine a coding bootcamp charges $10,000 for up-front tuition. When you agree to an ISA, they will multiply the up-front cost by three, making your total payment $30,000. Now, let’s say you would also like to take advantage of their “free” housing offer. The coding bootcamp will add on another multiplier, increasing your final cost to $40,000.

Different coding bootcamps might try using different multiplier models, but they all have one thing in common: it’s unclear what you are actually paying for.