You may have seen the term income share agreement, or ISA for short, pop up a lot more lately and be wondering what it even means. To make matters even more confusing, they also throw around more terms like payment cap and income share percentage. You may know that they're supposed to replaces loans, but it's hard to compare the two when they seem so different. It can be hard to look at income share agreements in a different scope from a loan, since they serve the same function. However, it's easy to see that they're two very different concepts.
What is an income share agreement?
An ISA is a method of funding that doesn't have principal and interest, like a loan does. Instead, with an ISA, you pay back a percent of your income for a set period of time. This means that payments will fluctuate up and down as your income changes throughout the years. However, since it does scale, this means that your payment will always be affordable. Another benefit of an ISA is that it normally has a minimum amount of income you must make before you have to make a payment. This means that if you ever make under that amount, your payments will pause. And unlike a loan, there's no interest building up, the payments are really just paused until you start earning above the limit again.
Once you make a set number of payments, based on the length of the term agreed upon at the beginning, the ISA will end, no matter what you paid back. That's right, you just have to make a set number of payments based on your income. But what happens if you get a huge raise or want to get out of your agreement early? Most ISAs also cover you on the upside with their cap.
What is the payment cap?
The payment cap is the maximum amount that you will have to pay in an ISA. In many cases the payment cap is set at 2.5x the funding amount, meaning you'll pay 2.5 times what you are funded. If you took a $10,000 ISA, the most that you could pay is $25,000. This is there to prevent you from paying way more than you would with a normal ISA. Once you hit the set payment cap, your ISA will end.
With a Defynance ISA, the payment cap actually scales with time. When you refinance your student loans with us, your payment cap will start at 1.1 times your funding amount and grow by 0.1 times the funding amount each year. This means that if you accepted a $10,000 ISA with Defynance, your payment cap would be $11,000 for the first year, $12,000 for the second year, and so on. And I know what you guys must be thinking, you guys must be cappin? Nah, no cap.
So the payment cap is what I'm gonna pay?
No, the payment cap is just the maximum amount that you will ever pay. In fact, in most cases, it's not even going to be reached and you will end up paying less than the cap. The payment cap is more of a protection for the consumer, because it prevents them from paying way more than their funding amount. Most income share agreements are also priced so that you won't hit the payment cap unless your income explodes, which is a good problem to have. So when thinking about an ISA, don't get stuck on the payment cap as the amount that you will pay, but a protection so that you won't pay more than that amount, no matter your situation.
Where can I learn more about income share agreements?
At Defynance, we refinance student loans using income share agreements, so if you have student debt and are working full-time, you can apply for our solution today. As we mentioned, we have a payment cap that scales over time to protect you. If you pay more earlier, your payment cap is lower.
If you're interested in applying, click here. Or if you want to learn more, you can find more information on our website.
