An Introduction to Income Share Agreements
What if there was a way to make it so that you only pay for your education if it resulted in a great job?
Historically, financing options like loans have been the primary method of paying for coding bootcamps, colleges, and other educational institutions. However, recently, student debt has reached a crisis level — around $1.6 trillion in student debt is owed in the United States. The amount of people relying on debt to finance their education is increasing every year, and part of the solution to this problem is Income Share Agreements.
An Income Share Agreement (also called “ISA”), may at first appear unfamiliar but is rather straightforward. At the most basic level, they work like this: an ISA-funder or school provides a student with money to be used towards tuition or school/living expenses. In exchange, the student agrees to pay back a small percentage of their future earnings after they graduate and once they get a job. With an ISA if you make less than a certain amount (the payment floor) you don’t make payments. Since the amount repaid is linked to the student’s earnings, if the student ends up in a low paying job, then the amount paid back may be less than the amount received. If, however, the student works towards a high-paying career, the amount paid back is still limited by a “ceiling” for further protection.
Income Share Agreements aligns risk and reward between student and school, by removing the upfront financial commitment required to pursue education. It’s like going to school with no upfront payments, and then only paying for the degree if it actually helps you get a better job. Because of this, ISAs align the risk and rewards and incentivize students, schools, and funders to work together to promote and fund only the best programs that lead to solid careers.
Since there may be uncertainty at this time around income and job prospects, this innovative financing option provides the flexibility students need as their interests, passions, jobs, and the workforce change. Payments may be paused for students pursuing graduate degrees, engaged in voluntary service, and working full-time, and making less than the payment floor.
Because of these upside and downside protections, an ISA is a great alternative to private loans and a great way to cover any remaining expenses after you’ve exhausted all scholarships and grants.
This brief introduction to Income Share Agreements will cover several things you should know about ISAs, including the following:
- The Difference between Income Share Agreements and Loans
- Key ISA Terms You Need to Know
- Finding an ISA That’s Right for You
The Difference between Income Share Agreements and Loans
Loans carry a principal balance plus interest, both of which must be repaid irrespective of your circumstances. This means, with a loan, you will always pay back more than the amount you borrowed.
With loans, interest continues to accrue during your grace period and any temporary deferment. This accrued interest is added to the principal balance you must repay. When this happens, the amount you are obligated to repay has actually grown despite your student loan being in deferment. This is called “negative amortization” and is a hidden cost leaving many borrowers in a much worse position than when they originally took out their loans.
Since ISAs have no principal balance that must be repaid, there is absolutely no risk of negative amortization. With an Income Share Agreement, the money you receive represents an investment in your future success, in exchange for which, you promise to share a small portion of your future income with your funder. So, depending on your future employment, the amount you share may be more or less than the amount you received. Students who enroll in ISAs only pay back a percentage of their future income if they earn over a certain amount after graduation.The students who do not succeed — that is, they earn under the minimum income threshold or don’t find a job — pay nothing back toward their ISA until they secure a job making more than the minimum income threshold.
With an Income Share Agreement, the school or lender you receive your ISA from is literally making an investment in you. As a result, many schools that offer ISA offer their students mentoring, career advice, and networking opportunities; all to ensure their students obtain a lucrative career.
Key Terms You Need To Know Regarding Income Share Agreements
Since Income Share Agreements are different from loans, you’ll want to familiarize yourself with ISA terms, such as:
- Income Share Percentage
- Monthly Payment
- Minimum Threshold
- Payment Cap
- Automatic Deferment
- Contract Term
Income Share Percentage (or Income Share): This is the fixed percentage of your monthly pre-tax income that you agree to share during your contract term. Depending on your ISA and program, Income Shares can range from 2.50% to as high as 17.50%.
Monthly Payment: This is what you pay back on a monthly basis after you’ve graduated during the term of your ISA contract. To put some numbers to this, if your Income Share is 5%, and you’re earning $60,000 per year (or $5,000/month), your Monthly Payment would be $250/month (i.e., your income share (.05) multiplied by your monthly income ($5,000) = $250).
Minimum Threshold (or “Floor”): The Floor protects you from making payments whenever you are earning less than expected based on your degree and career. If your monthly income is under your Floor, your payments are automatically suspended. So, for example, if your Floor is $50,000 your monthly payments will be automatically waived whenever you are earning less than $50,000/year (or $4,166/month).
Payment Cap (or “Ceiling”): The Payment Cap represents the most you might ever need to pay, in a high earning career. ISAs come with a limit (or ceiling) on what they can charge you over the life of the contract. Should you ever reach your ceiling, then your contract will automatically terminate, even if sooner than the full contract term.
Automatic Deferment: During periods of involuntary unemployment, under-employment, or if you are unable to work due to serious illness, your payment obligations will be automatically waived without penalty. Unlike loans, where you must apply for temporary deferment, with an ISA, your payments will be suspended automatically during periods of economic hardship. This is a key feature making ISAs a superior alternative to private loans, and is like having an insurance policy protecting your loans.
Contract Term: The contract term in an ISA is how long your payment obligations will last. Some ISAs require a fixed number of payments (an exact number, like 48 or 60), others have a fixed contract term (48 or 60 months). With the latter, you contract keeps counting down even if you’re in deferment, meaning you ultimately may not have to pay as much-however, it’s important to read your contract terms as some types of deferment (i.e., if you voluntarily quit your job to travel the world) may extend your contract term.
Finding an Income Share Agreement That’s Right for You
If you want an alternative financing method with built-in downside protection and no compounding interest, you should consider an ISA. Most importantly, an ISA is a balanced financing method that protects the student and rewards the school for empowering students to realize their potential without student loan debt.
Perhaps the most prominent coding bootcamp income share agreement is through Lambda School. Lambda School provides students with high-quality, nine-month courses in various areas like iOS development and full-stack web development. Further, they offer students hands-on career support to help them get hired. In exchange, students agree to pay back 17 percent of their income for the first two years they are employed — but only if they earn over $50,000 per year. If a student is really successful after graduation, the maximum they will ever pay is $30,000, after which their ISA will be complete.
Other prominent ISA programs include those offered by Kenzie Academy, Flatiron School, Make School, Thinkful, Northeastern, and Holberton School.
In 2016, Indiana’s Purdue University launched their “Back a Boiler” ISA fund. It allows students to borrow the money they need for college in exchange for a percentage of their future income. Students of any major can agree to share between 1.73 percent and 5 percent of their monthly income over a period of time in exchange for the money they need to finance their education. Students can borrow $10,000 per year, but they will pay back no more than 2.5 times the initial amount borrowed. Lackawanna College, Messiah College, and the University of Utah are among dozens of other universities currently exploring income share agreements.
What if My School Doesn’t Offer an ISA?
If you’re unmoved by existing income share agreement providers, you could always take on the challenge of convincing your school to start its own program. That’s where Meratas comes in.
Meratas provides a full-service SaaS Platform for Schools and Skills-Training Courses to design, administer, and service custom ISA programs. We help institutions create impactful ISA programs designed to promote student accessibility and increase enrollment.
Our programs are intended to incentivize students, schools, and capital providers to work together to promote and finance only the best educational programs that lead to more successful careers.
We hope this has helped you shed some light on Income Share Agreements as an alternative to private student loans. Want to learn more about ISAs and dive a little deeper? Check out our ultimate guide to Income Share Agreements here!
If you’re interested in offering an ISA option at your school or program you can schedule a call with one of our ISA specialists here! If you’re a student and think your school or program should offer an ISA option let us know here!