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Income Share Agreements: A Student Loan Alternative

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Paying for college usually involves big checks and often loans, even after scholarships are awarded and discounts applied. Now a third way to finance the rising cost of higher education, known as an income share agreement, is getting some traction.

ISAs are a substitute for loans. Instead of a student repaying the money they’ve borrowed plus interest starting soon after graduation, they forfeit a portion of their employment earnings for a number of years, usually up to 10.

(Related: How American Families Pay for College: 2017)

The percentage of income collected and the duration of the forfeiture depends on a student’s major, and payments are usually suspended when they have little or no income.

A student with a tech-related or business-related major will likely have an ISA that’s shorter in length with a smaller percentage of income collected than a student majoring in English or anthropology.

(Related: Student Loan Debt Is Now as Big as the US Junk Market)

Whether or not an ISA costs a student less than a loan will depend on the exact terms of the ISA versus the terms of a loan for the same amount. Also key is whether the ISA sets a  cap on how much money will be paid out.

ISAs are usually restricted to rising juniors, students in the second semester of their sophomore year who have declared their academic major. With that information in hand, the ISA provider can calculate the percentage of a graduate’s income that will be used to repay the funding.

Purdue University, a public land grant university in West Lafayette, Indiana, has distributed about $2 million to 160 students via its Back-a-Boiler ISA program, which started in 2016.

Lackawanna College in Scranton, Pennsylvania, and Clarkson University, in Potsdam, New York both private institutions have started ISA programs more recently. All three are working with Vemo Education to design and implement their ISA program. Lumni is another firm that designs and manages ISAs in the U.S. and is also involved in Latin America.

(Related: 7 Tips for Repaying Student Loans)

In early February another firm, Paytronage, founded by two graduates of the Wharton School at the University of Pennsylvania, introduced a variation on the same theme, an online marketplace that connects institutional sources of capital to students interested in ISAs. Financing comes from investors, not universities or their foundations as is usually the case for universities offering ISAs.

Proponents of ISAs extoll the flexibility of the programs: the ability to pause payments during unemployment or big declines in income most programs allow pauses if incomes decline to levels near 1.5 times the poverty rate (around $20,000 for individuals) and the progressive nature of the obligation since the income forfeitures are linked to a graduate’s earnings, not to a set interest rate.

(Related: Need a College Scholarship? A Website Has 7 Million of Them)

Critics say the programs resemble indentured servitude because they bind graduates to a contract that requires them to give up a portion of their income over a number of years.

Kevin James, founder and CEO of Better Future Forward, which works with another nonprofit, College Possible, to help low-income students afford college through ISAs, doesn’t buy the criticism.

“We think of ISAs as a progressive financing tool that basically align payments with ability to pay,” says James. And after graduation a student with an ISA has the freedom “to do what they like with their life … to make the choices they want to make,” says James noting that is is not necessarily the case for students who have taken out loans. They have to find a way to make their loan payments.

James, as well as Zach Pelka and Connor Swofford, the founders of Paytronage, recommend that students first take the maximum subsidized federal loan  before looking for an ISA. They agree that ISAs are a good substitute for Parent Plus loans, which are not subsidized, and private student loans, which charge higher interest than federal subsidized loans.

(Related: Top 10 Best Colleges With Low Student Debt: Kiplinger)

Mark Kantrowitz, a nationally recognized expert on student financial aid, scholarships and loans, says ISAs are very much like loans, each with a set amount owed and a fixed monthly payment, though they use different payment streams. But he also says ISAs can be particularly helpful to low-income students because they shift the risk of failure of repayment from students to investors.

The market for ISAs could potentially grow if Congress passes the Investing in Student Achievement (ISA) Act of 2017, introduced by Sen. Luke Messer, R-Ind., and Rep. Jared Polis, D-Colo., which creates a legal framework that allows colleges and private investors to more easily facilitate income share agreements, say Pelka and Swofford.

The bill, which resembles one introduced previously that never advanced, would establish consumer safeguards in ISAs including caps on payments based on income and length of contract, but it would also classify ISAs as qualified education loans, which could not be discharged through bankruptcy and would not be subject to state usury laws.


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