Four things a student should consider before using an Income Share Agreement to pay for college
April 08, 2019
For students who need some help paying for college, there may be another option other than student loans - if not now, then maybe in the future.
Income share agreements (ISAs), which are getting a lot of attention now as a possible replacement to student loans, are not yet available to all students. Currently, a limited number of institutions offer ISAs, and some institutions only offer ISAs for specific situations.
However, with ISA offerings expected to increase, there are things that students and parents should know before considering an ISA:
- Consider all other options to pay tuition first. Whether it is a student loan or an ISA, the student is agreeing to a financial obligation. Before taking out a student loan or agreeing to an ISA, the student should exhaust all other sources of college funding and have determined their eligibility for any financial aid that does not have to be repaid - grants, scholarships and work-study. Parents and student should save as much as they can before seeking a postsecondary education and look at other ways to reduce the cost of an education - such as considering schools with a lower cost of attendance or reducing living expenses if possible.
- Know the terms. What is the percentage the student will pay toward the obligation and for how long? What if the student is not earning income or needs to take a break from work? Right now, the few ISAs offered to students are all different. A student should know the details of the ISA and be able to estimate how much they might repay based on various income levels. That information will be important in being able to establish a budget and manage any other debts - such as student loans.
- Understand that investors are betting on the student's success. ISA investors are betting that you will be successful, which is a good thing. However, if you are successful, you will pay more on the investment than if you earned a lower income. While on the surface, this seems like an easy decision with little risk involved for the student, it is a decision that a student could regret in the future and one, which in some ways, is betting against their own success. Granted, some of the ISA programs offered now have caps on the amount repaid. In any case, students should understand the provisions and their obligations under the ISA.
- Ask questions about repayment options. Repayment of the ISA may have restrictions. For example, can the student pay off the debt early? In addition, students who have multiple student loans can consolidate those loans to help reduce monthly payments. What options does the student have if they have multiple ISAs? The answers to these questions will likely vary depending on the ISA.
As more institutions offer ISAs, there may be more clarity in how this compares to other financial aid options. In the meantime, students should carefully review the obligation and make sure it is a good fit to realize their college and career dreams.