Are Income Share Agreements right for me?

Students can fund an education three ways: paying upfront, taking out traditional loans, or increasingly, by taking part in ISAs. Given how new ISAs are, we work with every student to weigh the tradeoffs between each payment plan. The core advantage of funding an education with an ISA compared to debt is that the ISA payments adjusts to what you can afford based on income; the core advantage of debt is you know exactly what you’re responsible for paying regardless of how successful you are.

To decide which is right for you, consider four possible outcomes. For each, weigh the difference in cost between using an ISA and using debt, and consider whether your budget would work in either case:

  • Assume you land a job with an income just over the minimum income threshold of the ISA: since you won’t make payments if your income is below the minimum threshold, this is the worst case in which you’d make payments. For example, if the ISA has a minimum income threshold of $40,000, plan for that as your income and see if the resulting budget allows for your expected monthly needs, and compare those payments to expected debt payments. Generally speaking, at the minimum income, your monthly payments with an ISA will be lower than they would be with debt.
  • Assume an income moderately higher than the minimum threshold: the second case to consider would be an income moderately higher than the minimum threshold. A reasonable estimate for this might be 50–80% higher than the minimum income, so if the minimum is $40,000, planning for an income of $60,000 — $75,000 (where in that range likely depends on geography and professional experience). In this middle outcome, weigh the payments you’d make under an ISA vs those you’d make with a loan, and consider the impact of those payments on your budget.
  • Assume a high income: Finally, consider what happens if your income is significantly higher leading you to pay the cap amount. The cap will likely kick in at around 2–3x the minimum salary. Assume and income of 2.5x the minimum, and weigh what your ISA payments would be against expected debt payments. If you’re expecting this type of outcome based on your educational or professional background, you’ll likely find traditional debt preferable, as an ISA will likely be more expensive than taking out a loan.
  • Finally, consider the chance that some life disruption forces you to remain out of workforce an extended period. In this case, you wouldn’t make any ISA payments. This is where an ISA ends up providing some measure of insurance; you would fulfill an ISA’s obligations if you remain out of the workforce, whereas if you chose debt, you would default. This insurance-like feature of ISAs is one of its main draws.

Originally published at www.thinkful.com on September 14, 2017.