Income Share Agreement vs Student Loan: What Makes Better Financial Sense?
Inform yourself on your tuition financing options
Our country is facing a huge student debt crisis. Over the last thirty years, the cost of a college degree has risen 1,120%. The total amount of student-loan debt owed by Americans has surged from $150 billion in 2009 to $1.3 billion in 2017. By 2023, it’s expected that the debt load of the average bachelor’s degree holder will exceed his or her annual income.
Student-loan debt is one of the few types of debt that you can’t clear by declaring bankruptcy (along with alimony and child support). That means that student loan debt follows you for the rest of your life. The situation has gotten so bad that some young professionals have resorted to literally fleeing the country in order to evade their debt. These debt dodgers are in a situation where they will never be able to return to the United States, not even for a visit, without facing prison time (and their debt).
ISAs — A Chance at Debt-Free Education
Some universities are starting to address the problem with income-share agreements (ISAs). ISAs vary from school to school, but the basic idea is that you get to go to college for a low tuition or tuition-free, and in return, you’ll pay the school a percentage of your income after you graduate for a set number of months or years.
Purdue is the most notable example of a traditional college experimenting with ISAs, and hopefully other universities will start to take note. But the best opportunities for income share options are currently found at alternative education programs like Make School’s Product College. At the Product College, every student has the opportunity to pay for their education with either standard tuition, an ISA, or a combination thereof.
But how much financial sense do ISAs actually make? Are they better for students in the long run than federal student loans? The short answer is: it depends.
Making Sense of Your Income-Share Agreement
WIth an ISA, the school offering the agreement is treating the student like an investment, hoping that they will make at least X salary over the next several years. If you end up taking a low-income job or not getting a job at all after graduating, you’ll probably pay much less with an ISA agreement than you would with a student loan, and you won’t have any debt hung around your neck.
But if you are very successful and make a lot of money right out of school, you might end up paying more with an ISA than you would have with student loans. That said, if you’re making that good of a salary right out of school, paying your ISA shouldn’t be a problem. And in either case, you won’t be plagued by debt.
The tricky thing about ISAs is that they aren’t consistent from school to school. It’s important to do the math for yourself and figure out just how much you could end up paying with your ISA agreement. Here are a few key tips:
- Take the time to talk to the admissions officer at your chosen school to make sure you understand the terms completely, then double check the numbers on your own time.
- Ask if there is an earnings cap.
- Make sure to consider how your income will grow over the repayment period. Some schools have ISAs that last for ten years. You’ll probably be making substantially more at the end of ten years than you will be in the beginning. Be sure to factor your earning potential over the whole period into your calculations.
At the Product College, students have four options: no ISA, half ISA, three quarters ISA, or full ISA. With half ISA, students pay $30,000 in tuition across the two-year program, then they have a total of 21 months of tuition payback at 25% of their gross salary. Check out the details of all the options here.
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ISA’s are a relatively new option, and one that has the potential to tackle the student debt crisis. We’d love to have you join the conversation. Post your questions and thoughts on ISA’s vs students loans in the comments below.
The Product College is an accelerated two-year computer science program in San Francisco, with no up-front tuition. Alums work at Google, Facebook, top YC Companies, and more. Apply now.
This piece was originally published on the Make School Blog.
