Income Share Agreements Can Help Pay for College, but Experts Recommend Maxing Out Federal Student Loans First

How Do Income Share Agreements Work?

While ISAs are often advertised as alternatives to student loan debt, they are still credit products and must be repaid. In many cases, ISAs make repayment more confusing than loans, which can be straightforward to calculate based on the amount you borrowed and your interest rate.

“The terms are often fuzzy or misleading, making ISAs seem like they’re not loans,” says Thompson. “But ISAs are loans, and you have a financial obligation to repay them. In a lot of cases, it can be difficult to figure out what your obligation is in terms of the total repayment cost.”

ISAs are issued by individual companies, so terms can vary a great deal. In general, payments are usually 5% to 18% of your income, and repayment terms range from 24 to 160 months. Under the ISA terms, borrowers usually have to submit proof of income every year.

Some ISA companies have caps on your total repayment. Once you reach the cap listed on your disclosure agreement, the ISA is considered paid in full and you no longer have to make payments.

ISAs may also have minimum income requirements; if you don’t meet the income threshold, you aren’t required to make payments.

Income Share Agreements vs. Student Loans

While ISAs and student loans share some similarities, ISAs differ from student loans in the following ways:

• Varying terms: Federal student loans are carefully regulated, and all of the loans follow the same structure with the same repayment policies. But ISAs work differently. Because they’re issued by individual companies, terms and conditions can vary by issuer.
• Risk-based underwriting: While federal loans have the same rates and terms for all borrowers, ISAs use risk-based underwriting. Companies look at the borrower’s major, degree track, university, and academic record to determine their eligibility and terms. Lower-risk individuals can get more favorable terms — such as a lower percentage of their incomes going toward payments — than individuals deemed to pose a higher risk. Private student loans also use risk-based underwriting, but they look at a borrower’s (and their cosigner’s, if applicable) credit history and income to determine their eligibility and interest rate.
• Payments: Under an ISA, your payments are a percentage of your income. As your income increases, so do your payments. With student loans on standard repayment plans, the payment stays the same for the duration of the loan.

Will You Pay Less with an ISA or Student Loan?

If you’re trying to decide between student loans and ISAs, the best choice depends on your career path and expected income. Because repayment is based on a percentage of your salary, high earners end up paying a proportionally bigger sum every month.

“In some high-paying careers, ISAs aren’t as cost-effective,” says Pentis. “If you work as a doctor, for instance, student loans may be a better fit because you’ll pay much less than with an ISA.”

To compare, you can use the federal Loan Simulator tool to find out how much you’d repay with a student loan. For ISAs, use your expected income along with the income percentage and payment cap listed on your ISA agreement.

For example, we calculated the total repayment cost for ISAs and loans for students that borrow $20,000 and earn$55,260 per year — the average starting salary for bachelor’s degree graduates from the class of 2020, according to the National Association of Colleges and Employers (NACE)