Income-Share Agreements vs. Student Loans: Which Is Right for Your Career Path?
What if, instead of borrowing money for school at a certain interest rate, you promised a percentage of your future earnings to cover the cost?
And what if you could repay your loan within as little as five years after graduating, and the loan was linked to your income by a percentage to keep payments affordable? This is possible, with an income share agreement.
After considering those benefits, you might have a question of your own: Where can I sign up for an Income-Share Agreement (ISA)?
While Income Share Agreements sound promising, they’re anything but simple. In some ways, they can be better than borrowing a traditional loan, but in some cases, they may not be an ideal solution for some students.
Here’s what you need to know depending on your career path, before deciding on which financial aid route to take.
Which professions are perfect for income-share agreements (and which aren’t)
Aside from the fact that your major affects your college cost, it also leads to your career — and not all careers are suited for ISA payments.
1. Good fit for ISA: Web developer
Many coding schools and boot camps offer ISAs in exchange for the more detailed training you receive at a Bootcamp. Since Bootcamps and coding schools typically aren’t eligible for federal or private student loans, taking advantage of an ISA program if they offer one is an excellent idea.
When comparing these programs and their tuition, it’s imperative also to examine their ISA agreements. ISA agreements differ from school to school, so be sure to do the math, and think about what you could be paying back in the long run.
At the General Assembly, for example, you pay 10% of your $40,000-or-greater salary for 48 months. App Academy, meanwhile, calls for alumni earning $50,000 or more to repay only 28% of their first year’s salary and nothing more. Lambda school, which caps your payments at $30,000 and you only pay 17% of your monthly income once you’re earning $50,000 or more.
2. Bad fit for ISA: Government or nonprofit employee
If you plan on working full time in public service when you’re done with school — but need to borrow in the meantime — you’re probably better off with federal student loans.
An important reason to avoid ISAs, in this case, is the potential to have your student debt forgiven under Public Service Loan Forgiveness (PSLF). After 10 years of working for an eligible employer and making prompt payments, the remainder of your debt could be wiped away.
And while there are questions surrounding the future of PSLF, here is a list of other programs that could help you with student loan repayment. Yet, by signing an ISA contract, you’d lose out on any chance of forgiveness.
3. Good fit for ISA: Artist
Working as a so-called starving artist could mean an Income Share Agreement is a great fit for you. According to the Bureau of Labor Statistics, the fine arts are among the majors leading to the lowest-paying careers, with working artists earning a median salary of $49,520.
Other trade school careers or Bootcamp programs can also be suitable matches for ISAs as your school or program might not be eligible for federal or private student loans.
Be careful to check whether any ISA you sign will benefit you. Due to your perceived career path, some companies may not offer such favorable terms, including a higher percentage of your future income or a longer repayment period.
4. Bad fit for ISA: Teacher
Much like government and nonprofit workers, teachers aren’t best suited to using an ISA. Although teachers are often on the lower end of the wage scale, there are numerous options for educators to receive loan forgiveness or at least repayment assistance.
Beyond PSLF, you could obtain additional federal loan forgiveness via the government’s teacher loan forgiveness program. It can get up to $17,500 of your debt canceled after you work for five academic years at a low-income school or eligible education service agency. Consult a directory of eligible employers if you’re already eyeing the location of your future classroom.
5. Bad fit for ISA: Doctor
Although ISAs might be practical solutions for low-income earners, they may not be as cost-efficient for higher-income careers including medical professions. For example, as a doctor, you’d be paying out a percentage of what will likely be a six-digit income.
Most ISA agreements include caps on your repayment amount, though. As long as your payments are capped at a reasonable amount, say 1.5x or 2x your original amount, then it could be a little more reasonable for you. Still, an ISA could be an imperfect solution in the long run, at least compared with traditional forms of borrowing.
Say you’re a physician or surgeon who’s just starting out, taking home $60,390 (the 10th percentile salary among your peers, according to the Bureau of Labor Statistics). If you received $12,500 and agreed to repay 10% of your earned income over five years via an ISA obligation, and you don’t lose your job or skip payments, you’d shell out $30,195 if your agreement was lacking a reasonable payment cap.
Now say you instead borrowed $12,500 in the form of a traditional student loan and agreed to repay it — plus 6.00% interest — over 10 years. Under these circumstances, the loan would cost you simply $16,653 over the next decade, according to this student loan monthly payment calculator.
Also, like public servants and teachers, medical professionals typically have more access to loan forgiveness programs and loan repayment assistance programs. The majority of states offer thousands of dollars in assistance, for example, if you’re a physician working in an underserved area.
These are some good details to keep in mind if you’re thinking about pursuing a high-paying medical career.
To ISA or not to ISA? How to pay for school the smart way
An ISA is a terrific tool to consider as you pursue higher education. Although it can be a wonderful option for many students, it’s not the right path for every student.
Run the numbers to ensure your projected salary won’t leave you paying more under an ISA than you would have paid to borrow federal and private student loans. Ensure too, that you’re okay giving up some forgiveness and assistance options that you would have gotten with federal loans. It depends on the terms offered by the ISA program.
On the other hand, an ISA could be an excellent solution if your school isn’t eligible for federal loans, doesn’t work with reputable private lenders, or you want to have education protections throughout paying back your outstanding student loan debt.
Choosing your financial aid is an important decision, think about where you want to be when you graduate, specifically what career you’re thinking about, and make sure to do your research before deciding on one.
Interested in learning more about Income Share Agreements or how to fund your education with one? Check out the Meratas blog.