Everything you Need to Know about Income Share Agreements

30.12.19 09:21 PM Comment(s)

Income share agreements, or ISAs for short, have gained a lot of ground the last few months. This includes a number of proposed bills in congress. An ISA is a contract in which a person agrees to share a set percent of their income in exchange for an agreed upon amount of funding. With an ISA, the payments are tied to your income, so payments fluctuate as income changes. This allows your payment to always be affordable. Income share agreements have began to flourish due to unique features that can make them more fair than traditional funding sources. They have also come about due to a need for funding alternatives to student loans. The ISA ends after a set number of payments or a maximum period of time. 

ISA Protections

Income share agreements can be a great funding tool because they provide protections for people who are doing really well or those who are down on their luck. Income share payments automatically adjust with your income, so if your income falls or you lose your job, payments will fall. Most ISAs include a payment threshold, which is the minimum amount of income you need to make in order to make a payment. Under that amount, you aren't responsible for making payment. Another added benefit of ISAs comes from the fact that there isn't any interest. So if you are making lower payments or not making payments at all, you don't have to worry about interest building up. 

What if you're doing well in life? Wouldn't you end up paying way more than you typically would otherwise? Most ISAs also include protection from paying a lot more than a traditional loan with a payment cap. The payment cap is the maximum amount that anyone would pay in their ISA. The only time that someone will reach the payment cap is if they do really well in life, and in that case, they're doing well.

The Downside of income share agreements

So if an ISA has protection if you do well and if you don't do so well, where's the downside? There are a few negative aspects of ISAs to consider before going with one. If you do well in life, even with the upside protection, you would still end up paying more than you would with a loan in most cases. Of course, this also means that you have a higher income than average.

Income share agreements can also be confusing and have unclear regulations. With all new products, people aren't quite sure how to handle them legally. Many contracts follow best practices, but without regulation, some could be predatory. Many people also don't understand income share agreements completely, so they may be inclined to take one out that can hurt them. Be sure that you understand what the conditions are of an ISA before agreeing to one.

ISAs can be more tedious to work with than a traditional loan. With an ISA, you are expected to report any changes to your income. This will change your payment and your payment could fluctuate monthly. This is especially true if you have an hourly or commissions based job. ISAs also require you to submit your tax return each year in order to determine if the amount you paid is correct. If you underpaid by a large amount, then you will have to make that up on top of your monthly ISA obligation.

How some use ISAs today

Today, income share agreements are used in a variety of ways, but mostly at the college level. Some schools offer ISAs directly to their students as an alternative means of funding. Some coding bootcamps also offer ISAs in lieu of traditional tuition. For these bootcamps, they can't receive federal funding, so an ISA allows more access for low income individuals. 

College graduates can even refinance their student loans using an income share agreement. However, Defynance is the only ISA solution that currently does so. They refinance student loans for graduates working full-time.