Student loans are getting a bad rap. On any given day you can read stories about recent grads who unknowingly took out tens or hundreds of thousands of dollars to pay for college and now cannot repay them or make ends meet. Because of this, new products are coming to the market to help students attend and afford college without being burdened by the cost of repaying the loans. One product that is growing in popularity is an income share agreement.
In this post, I will walk you through how an income share agreement works as well as some of the benefits and drawbacks of such a plan.
What Is An Income Share Agreement?
An income share agreement is an agreement you make with a third party in which you will repay the third party a percentage of your income for a set period of time in exchange for receiving a fixed amount of money.
In many cases, an income share agreement looks like this:
- Repay 5-10% of income for 10-15 years
- Repay 10-15% of income for 5-7 years
For example, let’s say I enter into an agreement and receive $50,000 for college. Once I graduate, I have to pay the lender either 5-10% of my income every year for 10-15 years or I could pay them 10-15% of my income each year for 5-7 years.
So now that we know the basics, what are the benefits and drawbacks to income share agreements?
Set Repayment Terms: unlike with student loans where the term and amount can vary based on many factors, including how much your pay each month, with an ISA, you know what you are paying back. It is a set amount each and every month for a set period of time.
No Interest: income share agreements don’t accrue interest, so you won’t borrow $50,000 and end up paying back that amount plus 6% in interest charges.
Save Money: you could potentially save money by going with an ISA. This would happen if you were to take out a large sum of money and end up in a low paying job. Ideally, you wouldn’t want to be stuck in a low paying job, but it is nice to know regardless of your income, you are only paying a set percent each month.
Caps: there is a cap on the amount you end up repaying. For example, if you land a high paying job, your repayment may be capped at 2-3 times the amount you borrowed.
Overpay: while underpaying is rare, you could easily over pay. In this scenario, you might land a high paying job and end up paying back much more than you borrowed.
Limited Investors: the people that are lending the money decide who they want to essentially ìinvestî in by offering an income share agreement. In the case of low earning degrees, some investors may not want to offer an investment leaving the student with the only option of student loans.
No Prepayment: with student loans, you can pay more each month to save on interest charges and to get rid of the monthly payments quicker. With an ISA, you are on the hook for the entire 5-15 years, depending on the schedule you choose.
Before you jump at that chance to skip out on student loans and instead enter into an income share agreement, be sure to do your homework. Make sure it makes financial sense for you and doesn’t end up costing you more money in the long run.
Additionally, understand that many colleges and universities are only in the trial phase with regards to income share agreements. In other words, you might be stuck with taking out student loans for the time being until more college sign off on using an income share agreement.