What Are the Repayment Protections of Income-Share Agreements?

 December 16, 2019
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Income-Share Agreements

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Billed as a useful alternative to student loans, income-share agreements (ISAs) seem like a great deal, at least on the surface. Unlike loans, they don’t accrue interest. Plus, your monthly ISA payment only comes due when you’re employed — and in many cases, not until you’re earning a livable salary.

But what happens when, despite that salary, you’re struggling with repayment on an ISA? What if you’re burdened by another financial responsibility, such as a stack of medical bills or deep credit card debt?

Fortunately, ISAs do have some loan-like repayment protections to help stave off delinquency and default.

3 repayment protections of income-share agreements

If you have difficulties meeting your monthly payment for a federal student loan, you can enroll in income-driven repayment (IDR). You can also postpone your payments via deferment or forbearance, though this comes at the cost of accruing and capitalizing interest onto your balance.

Even many reputable private lenders allow borrowers to pause their repayment via economic hardship forbearance. A few are even starting to offer a federal loan-like income-based repayment.

With ISAs, which call for borrowers to make postgraduate payments only if they find a job, the protections are similar… but more sparse.

1. You can cancel your ISA at the last minute

If you sign an ISA but quickly regret it — maybe you’ve decided to take a semester off from school — you can request a do-over in some cases.

For example, if you were to call it quits within 30 days of enrolling at Holberton School, one of many tuition-deferring coding bootcamps, you could walk away unscathed. Keep in mind that such deadlines vary by school, so a last-minute change of heart isn’t always feasible.

By contrast, if you borrow a federal student loan and decide you no longer need the funds, you generally have more leeway. The Department of Education allows you to cancel the debt within 120 days of its disbursement.

2. You could defer — or pause — repayment

Income-Share Agreements only call for you to be in active repayment when you’re earning a salary, so you could automatically postpone your monthly payments in cases of unemployment. Even if you’re out of work voluntarily, you’d be temporarily off the hook (and, again, wouldn’t have to worry about interest building up).

Purdue University’s ISA, for example, makes clear that payments would be held up even if you left your job to start a family or travel.

Bear in mind, though, that taking time away from repayment generally won’t decrease the number of payments you must make to fulfill an ISA contract.

Again, the exact terms of the contract will vary, but it’s sometimes possible to receive a deferment on your ISA in three other situations:

  1. Returning to school: Like with federal and most private loans, you could shelve repayment responsibility while you’re enrolled. The same is true if you decide to transfer schools after taking out an ISA at your first campus stop.
  2. Volunteer or military service: This is, after all, a good reason for unemployment. Just keep in mind that any pro-bono work would likely have to be full-time in nature.
  3. Medical leave: Some schools, though certainly not all, also allow students to postpone payments in special circumstances, such as taking a medical leave.

Here too, however, the federal student loan system goes further, offering nine ways to receive a deferment or forbearance.

3. Your repayment won’t drag on forever

If you sign an ISA, at least you might not have to pay tens of thousands of dollars more than you originally received, or be in repayment for as long as 20 to 25 years. Both scenarios could happen to student loan borrowers.

Fortunately, ISA contract terms create limits on the amount of money and time you would spend in repayment. Thanks to this payment cap, you’ll repay only a set multiple of your original ISA balance — and no more. If your $5,000 ISA has a “two times” cap, for example, your repayment would max out at $10,000.

Given the lack of regulation around ISAs, however, watch out for agreements earmarked with high caps or even no caps at all.

Understanding the risks of income-share agreements

Proponents of ISAs point to some of the advantages of this model, including automatically limiting how much you pay each month without the need to apply for income-driven repayment, as with a federal student loan.

Still, some lawmakers, including Sen. Elizabeth Warren (D-Mass.), are calling for more regulation around ISAs. In a letter to Education Secretary Betsy DeVos, Warren and others wrote that “these risky contracts have virtually no transparency and have experienced little to no oversight from federal regulators.”

It’s not currently clear, for example, how ISAs would be treated during a bankruptcy proceeding, as noted by the American Enterprise Institute.

That makes it all the more important to understand the terms of an ISA agreement before signing on the dotted line.

Another lingering question to consider is whether your field of study and career path are a good fit for ISAs. Some students are better served by federal and private student loans, as least among today’s options.

If an ISA might be up your alley, check out which schools offer these agreements. And if you opt for an ISA, first ensure the protections are strong enough to keep your repayment going smoothly later on down the road.