Let’s play Two Truths along with a Lie. I’ll go first.
- I have two cats.
- I’m allergic to peppers.
- I graduated college with roughly 80k in student education loans.
If your answer was #2 — you’re absolutely correct! Peppers are in fact my favorite vegetable (or fruit?).
I’m a self-proclaimed cat lady who unfortunately graduated college having a ton of student debt.
However, the second wasn’t because I was irresponsible and spent my money recklessly on dumb stuff, but rather since i originate from a low-income household. This resulted in something that wasn’t included in grants or scholarships had to be taken care of through debt.
I’m still repaying my loans, and I’ve had to put things on hold, like purchasing a house or having kids. So, I’m always wondering: is there an easy method to cover college when scholarships and grants are just not enough?
Income share agreements are an intriguing solution.
What is definitely an income share agreement?
An income share agreement (ISA) is really a financial contract that you get a specific amount of cash upfront to pay for college in exchange for a fixed number of your future income.
Just like student loans, the money can be used as tuition and fees, but also to pay for other outlays, like room and board.
How do ISAs work?
There are two methods for getting an ISA:
- Through your school.
- By applying directly to an ISA provider.
Still, whichever path you choose, the application process would be the same. You’ll need to provide your basic contact information plus the following:
- Your field of study.
- The kind of degree you wish to pursue.
- Your GPA (in some instances).
- Your expected graduation date.
- The amount you wish to borrow.
- The date you need the funds by.
After your application is approved, you’ll get a letter with the information on your ISA. Here, you’ll find:
- The number of your income you’ll be expected to pay for.
- The different terms available to you (aka the amount of your repayment schedule).
- The minimum income threshold for you to begin to make payments.
Once you sign up the dotted line, your funds are sent to the college and disbursed for you. You’re not required to make any payments until after you graduate and start earning a certain amount.
Pros of having an ISA
- They don’t accrue interest. Except for Direct Subsidized loans, both federal and student loans start accruing interest the moment they’re disbursed. In that regard, ISAs have the upper hand, because they don’t accrue any interest while you’re in school.
- Flexible credit requirements. One of the best things about ISAs is that you don’t require a cosigner to obtain approved for funding. Additionally you don’t need a good credit score to qualify, which is often a must web hosting student education loans.
- Short repayment terms. Student loans possess a 10- to 20-year repayment term, depending on the loan. ISAs offer shorter repayment terms, ranging between 5 and Ten years.
- They can be cheaper than Direct PLUS and private student education loans. Direct PLUS loans (during the time of writing) have a set rate of interest of 6.28%, while private student education loans can have interest rates nearing 12%. By having an ISA, you are able to pay less than 2% of your income. Here’s a quick example: should you earn 50K a year and have a 2% ISA, your monthly payment is going to be roughly $83.
- They are capped. ISAs possess a limit how much you’ll have to repay. This varies per program, but the repayment amount is generally restricted to one-and-a-half to 2 times what you originally borrowed.
- Your monthly payment might be as low as $0. If you lose your work and have a low-paying job, your ISA payment could be as little as $0 — something won’t get having a private education loan.
- You’ll pay a set percentage throughout repayment. When you sign your agreement, that percentage is kept in for a lifetime, and could be between 2% and 17% of your future income, depending on your agreement.
Cons of getting an ISA
- Payments are hard to calculate. Unless you have a crystal ball, there isn’t a way to understand how much you’ll earn later on. The only way to have an estimate of methods much your instalments is going to be is by using a comparison tool. However, these estimates ought to be taken with a touch of suspicion, because the salary data they will use might be inaccurate.
- Shorter grace periods. Both federal and student education loans don’t require you to begin to make any payments until 6 months after you graduate — exactly the same can’t be said for all ISAs. For example, Lambda School’s ISAs possess a one-month grace period, while Stride Funding gives students a three-month grace period.
- More restrictive than student education loans. Student loans are available to almost any student, no matter their major, as long as they’re enrolled at least half-time and are in good academic standing. But ISAs are often limited to junior and senior undergrad students, and perhaps, approval will even rely on your GPA.
- Limited funding. With federal Direct PLUS loans and private student loans, you are able to borrow an amount equal to the entire cost of attendance as certified by the school. ISAs, on the other hand, usually are limited to an amount no greater than $25K per academic year, depending on the program.
- They aren’t widely available. Currently, you will find less than 10 colleges in the U.S. that provide ISAs and just a number of independent providers, including Stride Funding, Better Future Forward, and , which offers both traditional private loans and outcomes-based loans (aka ISAs).
- You could end up paying more. Remember I asserted you’ll always pay a set percentage of your income throughout the duration of your ISA? Well, that can be a double-edged sword. Why? If your income goes up, so will your payments.
- They are less regulated. Justin Draeger, president from the National Association of Student Financial Aid Administrators (NASFAA), says that because ISAs are a new concept within the college realm, they aren’t as strictly regulated as student education loans. So, there is lots of uncertainty with regards to how ISA companies may proceed with late or missed payments, and just how bankruptcy courts deal with these agreements.
- Refinancing might not be an option. Federal student loans could be consolidated into one single loan, having a single monthly payment. Private student education loans can be both consolidated and refinanced. However, there isn’t enough detailed information online on whether ISAs can be refinanced, so this is something to keep in mind.
- You won’t qualify for forgiveness. With federal student education loans, you may be eligible for a education loan forgiveness after making 120 consecutive payments, if you work on an eligible government agency or perhaps a non-profit organization. This isn’t an option when you get an ISA.
ISAs vs student education loans, which should you select?
Borrowing money for school is an extremely personal decision and one that may have long-lasting consequences.
That’s why Draeger, from NASFAA, recommends exhausting your federal aid options first (Direct Subsidized and Direct Unsubsidized loans), “primarily because of all of the protections that are included in the federal student loan programs.”
You should choose an ISA if…
You have at their maximum your Direct Subsidized and Direct Unsubsidized federal student loan options
Unlike both Direct Subsidized and Direct Unsubsidized Loans, that offer income-driven repayment plans, federal PLUS loans don’t offer this method, nor do private student education loans. Additionally, both PLUS and private loans could have a higher rate of interest, compared to ISAs, plus accrue interest while you’re in school.
You don’t possess a long credit history
Both private student loans and PLUS federal loans are approved according to credit, ISAs aren’t.
You don’t possess a cosigner
If you don’t have a stable income or a good credit score, it will likely be a hardship on you to definitely get approval for a private student loan with no cosigner. So, should you don’t have anyone who can co-own the loan with you, then an ISA could be the better option because they aren’t approved according to credit, just your future income.
To find out more about cosigners, read our full article.
Your parents or potential cosigners come with an bad credit history
Both PLUS federal loans and private student loans could be denied if your cosigner has an bad credit history. If that’s the situation, you’ll need to be applying on your own to have an ISA.
Choose PLUS student education loans or private student education loans if…
You’ve at their maximum Direct Subsidized and Unsubsidized loans and still have to borrow a considerable amount
ISAs normally have a borrowing limit of $25,000 or less, with respect to the company, per academic year. PLUS and private student education loans can be removed for that full price of attendance.
You have good or excellent credit
If you’re working full-time or part-time and also have a credit rating of 700+, then student loans may be a wise decision for you personally, as you’ll be able to secure a low interest rate on the amount you borrow.
Your parents can afford to take out debt for you
If both of your parents don’t mind getting loans under their name or cosigning them for you personally, then private or parent PLUS loans could be a more sensible choice. You’ll have the ability to predict your monthly obligations from the start, unlike with ISAs, which will depend on just how much you earn, plus secure low interest rate in case your parents have excellent credit.
Still, whether you choose student loans or an ISA, the most important thing is you comprehend the terms and conditions, in addition to being conscious of your potential return of investment when applying, to make sure your financial troubles is affordable.
Before you sign on the dotted line
Do your research
There happen to be several complaints filed against certain ISA companies for misrepresenting their product and engaging in other misleading practices, so be sure you browse the company’s history prior to signing. You can check this out by visiting the Consumer Financial Protection Bureau’s Consumer Complaint Database or by searching for the organization name around the Bbb.
Read everything carefully
Pay close focus on the relation to your agreement. If anything seems funny, ask the ISA provider for clarification or talk to your school’s educational funding advisor.
Compare programs, if possible
As I previously discussed, ISAs can be obtained using your school or perhaps an independent provider. When you purchase the latter, check out a couple of companies first, which means you choose the best deal open to you.
Income share agreements can be a good option to bridge the financial gap when scholarships, grants, along with other types of federal student aid aren’t enough to cover the costs of school.
They are specifically a favorable option to private student loans, as they offer several protections against loss of income and low earnings that private lenders currently don’t have.