Income Share Agreements: Understanding This New Way to Finance Education

The ever-rising cost of higher education is a problem that has been plaguing students and their families for decades. To combat this issue, a new method of financing education known as Income Share Agreements (ISA) is gaining popularity across the country.

What is an Income Share Agreement?

An ISA is a contract between a student and a financial institution or school, where the institution provides funding for a student`s education in exchange for a percentage of their future income for a set amount of time after graduation. The payment period usually ranges from five to 10 years, with the percentage of income sharing varying, but typically falling between 3% and 10%. Unlike traditional student loans, ISAs do not accrue interest and do not have a fixed repayment amount.

How do Income Share Agreements Work?

ISAs work by providing students with the funds required to complete their higher education, with the promise of repayments based on a percentage of their future earnings. This means that the more a student earns after graduation, the more they will pay back. Similarly, if a student earns less than expected, their monthly payments will be lower, providing flexibility for borrowers and reducing the risk of default.

What are the Pros and Cons of Income Share Agreements?

The main advantage of ISAs is that they offer a flexible alternative to traditional student loans, which often come with high-interest rates and fixed repayment terms. ISAs use the principle of shared risk, with lenders taking on a portion of the risk associated with a student`s potential future income. This allows students to pursue the education they need to achieve their career goals without incurring high levels of debt or facing default.

However, it is important to note that ISAs are not without their drawbacks. For example, the percentage of future earnings that students must pay back can be high, and the payment period can last for several years, which can make it difficult for students to plan for their future. Additionally, the use of ISAs is not yet widespread, meaning that students may find it harder to access this form of financing, particularly if they come from low-income backgrounds.

Conclusion

Despite their pros and cons, Income Share Agreements are a promising new way to finance higher education. They offer greater flexibility for borrowers and help address the problem of rising student debt. However, as with any new financial product, it is important to carefully evaluate the terms and conditions of any ISA before signing on the dotted line.