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If you’ve maxed out on the most affordable federal student loans and are looking for funds to complete your degree, an income share agreement (ISA) could be a good alternative to taking out federal PLUS or private student loans.
An ISA typically provides money for your final years of college or grad school. In return, you agree to pay a percentage of your monthly income for a fixed number of years after graduation.
Here’s what you should know about income share agreements:
What is an income share agreement?
ISAs are often offered to students majoring in STEM fields — science, technology, engineering, and math — because their skills are in demand.
Like a student loan, an ISA provides a lump sum of money to help you pay your tuition and living expenses while you’re in school. After you graduate, you’ll start paying the money back in monthly installments.
But instead of fixed monthly payments based on loan principal and interest, with an ISA you’ll pay a percentage of your gross monthly earnings — typically ranging anywhere from 2% to 17% — over a fixed period ranging from two to 10 years.
Even though you don’t accrue and pay a percent of the outstanding loan amount back as traditional interest, ISAs are usually structured so that you’ll pay back more than the amount you borrowed. But if you don’t earn as much as expected, your monthly payments will be smaller, and you might even end up paying back less than you borrowed.
- Income share percentage: This is the percentage of your gross income that will come out of your paycheck each month when you begin repayment. Depending on how much funding you need, your expected earnings, and the number of payments you agree to make, the income share percentage might be as low as 2% to 5%, but it could be as high as 17% or more.
- Minimum income threshold: An ISA will typically have a minimum income threshold before monthly payments are required. Our partner, Stride Funding, for example, says it doesn’t require that you make monthly payments if you’re earning less than $40,000 per year or $3,333 per month.
- Duration: The number of monthly payments required to repay your loan. For example, a five-year ISA would require 60 monthly payments. If you’re not earning enough to trigger a monthly payment, it would take more than five years to make the required 60 monthly payments.
- Payment cap: ISAs will typically cap the total amount you must repay at 1.5 to 2.5 times the amount borrowed. That way, if you earn more than you’d expected to after graduation, you don’t have to keep making monthly payments after hitting the payment cap.
What is the difference between an income share agreement and a student loan?
Income share agreements can be easier than some types of student loans for students to obtain on their own, but borrowing limits also tend to be lower.
Unlike private student loans, you don’t need a cosigner or good credit to get approved. If you’re on track to complete a degree in a desirable field with good earnings, that’s usually enough to make you a good candidate for an ISA. But that doesn’t mean it’s always the best choice.
If you need to borrow for college, an income share agreement shouldn’t be your first choice, said Tess Michaels, founder and CEO of Stride who offers ISAs.
“We always advise students to take scholarships, grants, and subsidized federal loans first,” Michaels said. “We are an alternative to private loans and some unsubsidized federal loans.”
But as interest rates on federal loans come down, it’s primarily private loans that ISAs are competing with, she said.
Income share agreements vs. private student loans vs. federal PLUS loans
| ISAs | Private student loans | Federal PLUS Loans | |
|---|---|---|---|
| Borrowing limit | Depends on expected earnings | Up to cost of attendance (subject to ability to repay) |
Up to school-certified cost of attendance (no evaluation of ability to repay) |
| Terms (years) |
2 to 10 | 5 to 15 | 10 to 25 |
| Credit requirements |
|
|
Can’t have an adverse credit history |
Find Out: How Student Loans Work
More details on the differences between ISAs and student loans
Although you don’t pay interest in the traditional sense on an ISA, it can be hard to predict what your total repayment costs will be, because the total amount repaid depends on your future earnings.
And unlike a student loan, you can’t refinance an ISA with another lender on terms that are more favorable to you. If you want to pay an ISA off early, you can pay the amount that brings you up to your payment cap, if you have one. But this won’t reduce your total repayment at all.
When you hit your borrowing limits on federal student loans for undergraduates, your parents might be able to take out federal PLUS to cover funding gaps. If you’re in grad school, you can take out PLUS loans in your own name.
Undergrads and grad students can also turn to private student loans, but usually they must be cosigned by a parent or someone else who can demonstrate a solid history of credit and earnings.
An ISA allows students to secure additional funding for college in their own name without a cosigner — even if they haven’t established their credit yet.
With federal PLUS and private student loans, you can borrow right up to your school’s cost of attendance, minus any financial aid you’ve already received.
With federal PLUS loans, there’s no evaluation of your ability to repay a loan — just a cursory credit check to make sure you have no serious blemishes on your credit report. Private student lenders will evaluate you, or your cosigner’s, ability to repay a loan. With an ISA, your funding limit will depend on your expected earnings.
With most student loans, interest charges start piling up as soon as you take out the loan. Interest might also accrue on student loans during periods when you’re unable to make payments due to financial hardship.
With an income share agreement, your funding won’t accrue interest, so your loan balance doesn’t grow while you’re in school. You’re done paying an ISA back once you’ve made the agreed-upon number of monthly payments, or hit a predetermined payment cap.
Your total repayment costs in an ISA will depend on your future earnings. So it can be tricky to figure out what your total repayment costs will be, and whether a loan would be cheaper.
With a student loan, you can get a very good estimate of what your repayment costs will be if you have a fixed interest rate and term, and you’re able to stick to your repayment plan. However, a growing number of federal student loan borrowers are ending up in income-driven repayment plans that can also be unpredictable and end up costing them more.
Will an income share agreement save me money?
In recent years, income share agreements have been competitive with federal PLUS loans and private student loans. But as student loan interest rates fall, ISAs can be less competitive.
The chart below compares the estimated monthly payments and total repayment costs for a student who borrows $10,000 using an ISA, a federal PLUS loan, or a private student loan.
| Type of credit | Interest rate | Monthly payment | Total repayment costs |
|---|---|---|---|
| Income-share agreement | N/A | 60 payments of $234 to $270 | $15,096 |
| Federal PLUS loan | 5.30% | 120 payments of $119 | $14,255 |
| Private student loan | 6.32% | 120 payments of $120 | $14,442 |
| Income-share agreement assumes starting salary of $68,000, with 60 monthly payments equal to 4.15% of gross pay. Calculations assume loans accrue interest for 15 months before borrower begins repayment. Because of up-front origination fees, PLUS loan borrowers must take out a loan of $10,442 to receive $10,000 in funding. Total payments for PLUS loan includes origination fees. Private student loan interest rate represents average for 10-year fixed-rate loans selected by borrowers using the Credible marketplace in May. Source: Stride Funding Get a Quote tool, Credible student loan marketplace |
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In the hypothetical example above, a computer science major at Indiana University receiving $10,000 in funding through a Stride ISA would pay back $15,096 over 5 years. That’s based on the assumption that they’d earn a starting salary of $68,000, and commit to paying 4.15% of their income for 60 months. As their income increased, so would their monthly payments — from $234 a month in 2021 to $270 a month in 2025.
Because rates on both federal and private student loans have fallen dramatically, in this hypothetical case, an ISA could wind up being more expensive than taking out a federal PLUS or private loan.
It’s important to compare the estimated cost of the actual ISAs and loans you can qualify for. When using the comparison tools provided by schools and ISA providers, double-check the assumptions they make about interest rates, and keep in mind that your future earnings could be higher or lower than estimated.
If you think an income share agreement might make sense for your situation, see if you’re eligible today with Stride
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Credible receives compensation from Stride Funding
How to enter into an income share agreement
There are two paths to securing funding for your degree through an ISA: From your school or from a private company.
- Receive an offer or quote: The terms you’ll be offered when you apply for an ISA will depend on how much funding you need and your predicted earnings, based on your school and major. To get an offer, you’ll need to provide the type of degree you’re seeking, your school, major, and expected graduation date.
- Don’t forget to compare your options: Because every student will be offered different terms on ISAs, it’s important to compare the ISA terms with private student loans and federal PLUS loans.
- Apply for ISA funding: If you decide an ISA is right for you, you can submit a formal application. If you’re applying with a private company, you might need to provide your latest transcript and proof of enrollment.
Here are some colleges, universities, and career schools that offer ISAs:
Here’s a roundup of some of the companies offering ISAs as of June 2020:
How do I know if an income share agreement is right for me?
Ultimately, the decision to go with an ISA or a student loan might depend on more than just which might provide the lowest total repayment cost. An ISA can be cheaper to repay than a student loan and provide flexibility in repayment if your career hits a bump in the road.
Before making a decision, be sure you have a good idea of the total amount of debt you’ll take on to earn your degree, and what your monthly payments on all of your debt will add up to.
“It’s not always an either-or situation,” Michaels said. “Many students will take an ISA, and bundle it with a traditional loan. We help them see what the total cost looks like, and what’s the right mix for you.”
To help students land jobs, Stride provides career services including networking, job postings, and resume and cover letter templates personalized by field. The company also creates weekly content offering guidance on students’ chosen career paths in fields including healthcare, engineering, computer science, and business.
“What’s really critical is everyone [the lender, school, and student] is better aligned,” Michaels said. “We only succeed if the student succeeds.”
Check If You’re Eligible
Credible receives compensation from Stride Funding
