While a student can use both income share agreements (ISAs) and loans to finance their education, they are two separate concepts. Income share agreements have built in protections that help the consumer during economic hardship. There’s also no obligation to pay back the full amount funded. However, there is a chance to pay back more than was funded if you have a higher than average income. This is different from loans, which have a steady payment throughout their term when making on-time payments. Loans also continue to accumulate interest over time, even during economic hardship. This can cause people to stay in a cycle of debt if they are not able to pay the loan back.
What is an Income Share Agreement (ISA)?
An income share agreement is a financing tool that utilizes a person’s ability to pay, instead of interest. In exchange for funding, a person pledges a certain percent of income for a set period. For example, a person may receive $7,000 in exchange for 4% of their income for 5 years. That means they will be responsible for paying that 4% every month, including if their income goes up or down. Most ISAs also allow for consumers to stop paying if they are below a certain income threshold (around $20,000 per year). This ensures that they only make payments when they can afford to do so and does not penalize them for having a low income. ISAs will also include a payment cap, so if the consumer earns a great job after taking out the ISA, they will not have to pay an extravagant amount more than they were funded.
Differences Between Income Share Agreements and Loans
As mentioned before, income share agreements have built in protections for the consumer when they fall into tough economic times. If the consumers income falls below a certain annual threshold, then they are not responsible for paying anything. This also prevents interest from accumulating. With a loan, a person may be able to defer their payments or enter forbearance if they are not able to pay. However, the loan still accumulates interest and that person is now responsible for paying even more money back. If a person has a high paying job, then they may end up paying more than they would with a loan. The borrower would be responsible for sharing their income up until they reach a cap determined by the ISA provider.
Income share agreements also have no obligation to pay back the entire amount that was funded to income sharer. This means that if someone took out an ISA for $10,000, they don’t have to pay back the entire amount. If they struggle to find a job or have a low paying job during their ISA term and the payment term ends, they’re off the hook. This is unlike a loan, where one always have to pay back the principal, plus any interest that has accumulated. This is one of the biggest advantages of using an ISA over a loan.
Income share agreements also have a variable payment, which will fluctuate with income. This can happen with a variable rate loan, but the change may not be as drastic as with an ISA. If an income sharer has a large swing in income, then their ISA payment could change drastically. The monthly payment can be as low as $0, but will never be more than a small percent of one’s monthly income.
Of course, federal student loans will have some protections that other loans don't. They have deferment, forbearance, and even have income-driven repayment plans to help those that are struggling to make repayment. This may seem similar to an ISA, but there is still interest tied to these programs that will build up over time.
How do I get an Income Share Agreement?
At the moment, there are few options on the market to receive an ISA. One option is to go to one of the few schools in the country that offer this product, but what if you do not want to go to any of those schools? If you’re from a low-income community, some non-profit organizations currently offer select students with an opportunity to get funding through an ISA, but they can only offer them to a select amount of people. At the moment, Defynance has an option for people looking to refinance their existing student loans.
