If you haven’t heard of income-share agreements (ISAs), then you probably soon will. This substitute for traditional loans – which calls for borrowers to repay a percentage of their earnings after leaving school – seems to be drawing attention from those seeking to avoid student loan debt.
A slight majority of college students said they would be interested in at least having an ISA as a possible option, according to a new Student Loan Hero survey on the subject.
More than half of the 1,050 current college students we polled said the Department of Education should offer an income-share agreement. At the same time, about 1 of 5 would “strongly consider” signing an ISA for a future semester’s worth of bills.
On the other hand, this new funding method is still relatively little understood, and most respondents were unaware of how ISAs work or how they differ from student loans.
- Many college students are interested in ISAs as an option, with 51% desiring a government-run ISA alongside traditional student loans. About 21% of respondents said they would “strongly consider” an ISA, while another 46% would want to learn more first. (Read more)
- Some college students say ISAs don’t seem as “crushing” as student loan debt (29%), but roughly one-third (35%) fear having to repay much more over time if they ultimately pull in a high salary. (Read more)
- But at the same time, most college students weren’t familiar with ISAs. Nearly two-thirds (64%) reported having never even heard of the term before taking this survey. (Read more)
- A majority of college students aren’t sure whether to prioritize ISAs or student loans, with only 23% of respondents clearly preferring one option over the other. (Read more)
Coding bootcamps have been relatively eager adopters of income-share agreements in recent years, with aspiring tech workers trading a portion of their future salary in exchange for their education.
Colleges that provide ISAs, meanwhile, are still small in numbers, though some well-known schools – such as Purdue University, which introduced ISAs in 2016 – do offer this program.
Just 14% of college students surveyed said that their own school offers ISAs, while the majority of respondents (61%) said they weren’t sure whether it was an option in their school’s financial aid package.
After we gave a brief overview of ISAs to our survey respondents, however, close to half said they would want to learn more before taking one on.
Currently, students attending schools without an ISA offering can obtain one via a direct-to-student provider like Stride Funding or Align. But a Department of Education income-share agreement could be a game changer, not only by providing more opportunity to get an ISA, but also by regulating them and educating students as to their pros and cons.
A government-funded ISA is on the table by the way, with the Department of Education exploring a pilot program involving a limited number of schools.
At first glance, income-share agreements seem like a great replacement for federal or private student loans, since they’re not tagged with an interest rate. Also, ISA contract terms typically dictate that you don’t have to repay your debt if you don’t make a high enough income.
Current college students see both these factors as among the top benefits of an ISA.
On the other hand, students aren’t shy about what turns them off about ISAs. They’re cognizant of the fact that repayment may depend greatly on what job they take after college. ISA borrowers could pay much more over time if they end up with a relatively high salary than they might with a student loan. About 35% of respondents reported this fear after learning the details of how ISAs work.
Because of their novelty, ISAs also don’t face the same amount of regulation as student loans lent by banks, credit unions and online companies who are watchdogged by the government and the Consumer Financial Protection Bureau (CFPB).
Former presidential candidate Sen. Elizabeth Warren (D-Mass.) and several of her colleagues have expressed concern that “these risky contracts have virtually no transparency and have experienced little to no oversight from federal regulators.”
While most respondents to the survey had views on what they saw as advantages and disadvantages of income-share agreements, most of them needed to have ISAs explained to them first.
Just 14% of current college students polled reported knowing what ISAs are, and only 13% knew how to go about getting one.
Even among those students who said they were familiar with ISAs, some appeared to have misunderstandings about how they work.
For example, ISAs only call for you to enter repayment when you’re earning sufficient income, so you might think they’re always affordable. Unfortunately, however, repayment protections for ISAs are often lacking because they don’t always include student loan-like repayment pauses (like deferment and forbearance). As a result, ISA borrowers could end up without a safety net if they suddenly face financial hardship not related to their job, such as a new stack of medical bills.
Another big misconception: 37% of college students surveyed thought all majors were eligible for ISAs. In truth, some school-based ISAs limit their programs to students in certain fields of study or certain class years.
Given how little most students know about ISAs, it’s not surprising that most respondents to our survey weren’t sure whether they would be better off with an ISA or a student loan. Just 23% said one or the other would be the better product for their situation.
Supplementing your college financing with an ISA after exhausting your federal student loan limits might be a great idea in many cases – at least if you’re planning to enter a career well-suited to ISAs (Check out our guide to which professions are ISA-friendly and which aren’t).
Still, deciding between ISAs and private student loans — which is the more typical alternative to federal loans — could be a tougher call. Both these types of funding require post-school repayment that can span years, potentially stifling your personal finances.
It’s not a one-size-fits-all decision. An ex-chef transitioning to a tech career could be a much better fit for an ISA than an aspiring healthcare professional who’s set to earn six figures-plus, for example.
To make your choice, also consider your appetite for risk, since ISAs are largely unregulated, at least as compared to federal and private student loans.
Also, while ISAs don’t accrue hundreds or even thousands of dollars of interest while you’re in repayment, you could still end up paying more than twice what you originally borrowed, depending on your lender’s “payment cap.” (If you’re not sure what payment caps are, check out our guide to ISA contract terms.)
And one final piece of advice: Don’t borrow an ISA or a student loan until you’ve reviewed all the strategies to pay for college that don’t require debt.