Imagine if companies treated people like investments rather than students. They would invest in individuals’ educations based on their grades, intended major, and career prospects. Rather than borrowing thousands of dollars in student loans, college students could get backed by an investment firm.
It may sound impossible, but it’s happening now. Purdue University made waves in the education community last year by announcing a new approach to paying for school: the income share agreement.
Offered as an alternative to student loans, the school created the “Back a Boiler” fund. They tapped into the power of investing partners and successful graduates to offset the cost for future students.
While income share agreements are not common, they are becoming increasingly popular as schools and families look for ways to minimize student loan debt. With the national student loan debt totaling over $1.3 trillion, out-of-the-box ideas are becoming hot topics.
What is an income share agreement?
In an income share agreement (ISA), the school deposits funds into an investment account run by an external company. The money is invested to yield returns that continue to grow to pay for students’ educations.
ISAs function like income-driven repayment plans, only they are offered through the school and the investment firm rather than the federal government.
Through the ISA, students agree to repay a set percentage of their income for a specific time period. Typically, it works out to 10 to 20 percent of the student’s discretionary income over the course of 10 years.
Unlike income-driven repayment plans, however, ISAs do not have set standards. This difference means that the repayment terms can vary depending on a student’s major or career path.
For example, a law student at a top-tier school might be considered a better investment than an English major at a less prestigious institution. Therefore, the law student could have access to more favorable repayment options.
Investment firms choose which students are the best risks and which are not. That may mean that some students are ineligible, and firms may eliminate entire schools.
Under an income share agreement, some graduates will end up paying their entire tuition amount back. However, in other cases, students will pay back much less than they would have paid if they had to foot the bill themselves. That change makes ISAs a great alternative to interest-heavy student loans.
When ISAs make sense
While ISAs might be a good idea for some people, they won’t work for everyone. ISAs make sense for a very particular set of students.
For students in need of additional money on top of federal loans, an ISA can be a valuable option. Particularly for people who are debt-averse and are wary of hefty interest rates, an ISA can be an appealing alternative to private student loans.
Finally, for students who do not qualify for federal aid, ISAs can be a way to pay for programs that normally do not qualify for federal loans, such as trade schools or community colleges.
However, ISAs are not practical for high-earners. Because their incomes determine their repayment terms — and unlike loans, can not be paid off early — they can end up paying substantially more than if they had used traditional loans.
What schools offer ISAs?
ISAs are big in South America but are still rarely used in the United States. However, there are some places where ISAs are available to students.
Oregon launched a pilot of the Pay It Forward model in 2013 and it continues in a very limited capacity. Under this plan, students attend college without paying for tuition and pay back a percentage of their incomes. The Pay It Forward program is currently under committee review and is expected to be sent to lawmakers in 2017.
According to the American Institute For Research, ISAs have also been used in a limited capacity at Wharton University and Stanford University.
In some cases, students can get an ISA by connecting with investment firms directly, rather than by going through the school. One of the biggest companies currently offerings ISAs is Cumulus Funding. They offer ISAs that cover as much as $10,000 of your education costs in return for a percentage of your income.
In the technology space, trade schools like App Academy use a similar model to teach students skills for a specific job. While the number of places offering ISAs is small now, the number is expected to grow, particularly as Purdue University expands its program.
The future of tuition
As tuition costs and student loan balances continue to skyrocket, schools will present more alternatives to student loans. An income share agreement is only one possibility.
Everything from scholarships to side-hustles can help minimize how much debt you need to take on. Evaluating your options before signing up for a loan is a smart way to limit your debt and your repayment terms.
If you’re in school and are ineligible for an ISA, or are a recent graduate struggling to manage your debt, you still have options, including:
- Refinancing your loans
- Consolidating your debt with a Direct Consolidation Loan
- Private student loans
Talk to your lender and compare offers to get the right option for you.
Need a student loan?Here are our top student loan lenders of 2018!
|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
2 Important Disclosures for Discover.
3 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB) or Turnstile Capital Management, LLC (TCM), which are not affiliated entities. Certain restrictions and limitations may apply. Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. All loan products may not be available in certain jurisdictions. Other terms and conditions apply. Ascent is a federally registered trademark of TCM and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2018 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
7 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
8 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
9 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.69% – 10.94%1||Undergraduate, Graduate, and Parents||Visit CollegeAve|
|3.97% – 12.97%3||Undergraduate and Graduate||Visit Ascent|
|4.34% – 12.99%2||Undergraduate and Graduate||Visit Discover|
|4.12% – 10.98%*,4||Undergraduate and Graduate||Visit SallieMae|
|5.03% – 11.23%5||Undergraduate and Graduate||Visit PNC|
|4.00% – 13.00%6||Undergraduate and Graduate||Visit SunTrust|
|4.72% – 9.81%7||Undergraduate and Graduate||Visit LendKey|
|3.72% – 9.68%8||Undergraduate, Graduate, and Parents||Visit CommonBond|
|4.19% – 12.06%9||Undergraduate, Graduate, and Parents||Visit Citizens|