Many students end up taking out loans to finance the cost of college. As of the first quarter of 2021, Americans collectively held $1.57 trillion in student debt, up $29 billion from the previous quarter. And a significant share of borrowers were struggling with their debt burdens: Just under 6% of total student debt was 90 days or more past due or in default.
Students looking for alternatives to student loans can apply for grants and scholarships, take on work-study jobs or other part-time work, or find ways to save on expenses.
Recently, another alternative has appeared on the table for students at certain institutions: income share agreements. An income share agreement is a type of college financing in which repayment is a fixed percentage of the borrower’s future income over a specified period of time.
As this financing option grows in popularity, here are some key things to know about how these agreements operate and to help you decide whether they’re the right choice for you.
How Income Share Agreements Work
Unlike student loans, an income share agreement, also known as an income sharing agreement or ISA, doesn’t involve a contract with the government or a private lender. Rather, it’s a contract between the student and their college or university.
In exchange for receiving educational funds from the school, the student promises to pay a share of his or her future earnings to the institution for a fixed amount of time after graduation.
ISAs don’t typically charge interest, and the amount students pay usually fluctuates according to their income. Students don’t necessarily have to pay back the entire amount they borrow, as long as they make the agreed-upon payments over a set period. Though, they also may end up paying more than the amount they received.
Income share agreements only appeared on the scene in the last few years, but they are quickly expanding. Since 2016, ISA programs have launched at places like Purdue University in Indiana, Clarkson University in New York, and Lackawanna College in Pennsylvania. Each school decides on its own terms and eligibility guidelines for the programs. The school itself or outside investors may provide funds for ISAs.
Purdue University was one of the first schools to create a modern ISA program. Sophomores, juniors, and seniors who meet certain criteria, including full-time enrollment and satisfactory academic progress, are eligible to apply.
Students may have a six-month grace period after graduation to start making payments, similar to the six-month grace period for student loans, and the repayment term at Purdue is typically 10 years. For some schools, however, the repayment term ranges from two to 10 years.
The exact amount students can expect to pay depends on the amount they took out and their income. The university estimates that a junior who graduates in 2023 with a marketing major will have a starting salary of $51,000 and will see their income grow an average of 4.7% a year.
If that student borrowed $10,000 in ISA funds, he or she would be required to pay 3.39% of his or her income for a little over eight years. The total amount that student would pay back is $17,971. The repayment cap for the 2021-2022 school year is $23,100.
Again, every ISA is different and may have different requirements, so be sure to check with your college or university for all the details.
The Advantages of Income Share Agreements
ISAs aren’t for everyone, but they can be beneficial for some students. For example, students who don’t qualify for other forms of financial aid, such as undocumented immigrants, may have few other options for funding school.
For students who have already maxed out their federal loans, ISAs can be a more affordable option than Parent PLUS loans or private student loans, both of which sometimes come with relatively high interest rates and fees.
Compared to student loans, many ISAs also protect students by preventing monthly payments from becoming unaffordable. Since the amount paid is always tied to income, students should never end up owing more than a set percentage for a fixed period of time. However, a student’s field of study may impact this. Students who are high earners after college may end up paying more to repay an ISA than they would have under other financing options.
If a student has trouble finding a well-paying job, or finding one at all, payments typically shrink accordingly. For example, Purdue sets a minimum income amount below which students don’t pay anything.
In Purdue’s case, the student won’t owe anything else once the repayment period is over, compared to student loans that can multiply exponentially over time due to accrued interest.
Purdue and several other universities also set the amount and length of repayment based on a student’s major, meaning monthly payments can be more tailored to graduates’ fields and salaries than student loans are. For fortunate students who see their income rise beyond expectations, many schools ensure the student won’t pay beyond a certain cap.
Potential Pitfalls of Income Share Agreements
ISAs come with some risks and drawbacks, as well. Firstly, since the repayment amount is based on income, a student who earns a lot after graduation might end up paying more than they would have with some student loans. This is because if a student earns a high income after graduating, they’d pay more to the fund. Second, the terms of repayment can vary widely, and some programs require graduates to give up a huge chunk of their paychecks.
For example, Lambda School , an online program that trains students to be software engineers, requires alums who earn at least $50,000 to pay 17% of their income for two years (up to $30,000). This can be a burden for recent graduates, especially compared to other options like income-driven repayment, which determines the percentage of income going towards student loans based on discretionary income.
Currently, there is very little regulation of ISAs, so students should read ISA terms carefully to understand what they’re signing up for.
No matter what, income share agreements are still funding that needs to be repaid, often at a higher amount than the principal.
So you’re still paying more overall for your education compared to finding sources of income like scholarships, a part-time job, gifts from family, or reducing expenses through lifestyle changes or going to a less expensive school.
How Do Income Share Agreements Impact You?
Many schools’ ISA programs are designed to fill in gaps in funding when students do not receive enough from other sources, such as financial aid, federal or private student loans, scholarships or savings. Thus, it’s important to understand how an ISA will impact both your long-term finances and other methods to pay for college.
ISAs do not impact need-based aid like grants or scholarships. Students with loans, however, could have a more complicated repayment plan with multiple payments due each month.
With ISAs, there is less clarity as to how much you’ll end up repaying from up to 10 years of income. As your income changes, your payment will remain the same percentage unless it falls below the minimum income threshold ($1,666.67 at Purdue) or reaches a repayment cap.
Whereas students may pay more than the loan principal to reduce interest, ISAs often require reaching a repayment cap of roughly double the borrowed amount to be paid off early.
Depending on your future income and career path, an ISA could cut into potential savings and investments or serve as a safety net for a less stable occupation.
Who Should Consider An ISA?
As previously mentioned, income share agreements are an option for students who have maxed out on federal loans and scholarships. There are other circumstances when an ISA may or may not be worth considering.
Colleges may require a minimum GPA to be eligible for an ISA. For instance, Robert Morris University requires incoming students to have a 3.0 high school GPA and maintain a 2.75 GPA during their studies for continued funding eligibility. Taking stock of how an ISA aligns with your academic performance before accepting funding could reduce stress later on.
Since ISA programs structure repayment as a percentage of income, graduates who secure high-paying jobs can end up paying a significant sum compared to the borrowed amount. An ISA term could be more favorable to students planning to enter sectors with more gradual salary growth, such as civil service.
Repayment plans at income sharing agreement colleges are not uniform. Students at schools with lower payment caps and early repayment options may find ISAs more advantageous.
Considering Private Loans
Students should generally exhaust all their federal options for grants and loans before considering other types of debt. But for some students looking to fill gaps in their educational funding, private student loans may make more sense for their needs than ISAs.
Recommended: Examining the Different Types of Student Loans
In particular, students who expect to have high salaries after graduation may end up paying less based on interest for a private student loan than they would for an ISA. Some private loans can also allow you to reduce what you owe overall by repaying your debt ahead of schedule.
SoFi doesn’t charge any fees, including origination fees or late fees. Nor are there prepayment penalties for paying off your loan early. You can also qualify for a 0.25% reduction on your interest rate when you sign up for automated payments.
As mentioned, an income share agreement is an alternate financing option for college. An ISA is generally used to fill in gaps in college funding. Generally, it’s an agreement between the borrower and the school that states the borrower will repay the funds based on their future salary for a set amount of time.
One alternative to an ISA could be private student loans. Keep in mind that private loans are generally only considered as an option after all other sources of federal aid, including federal student loans, have been exhausted.
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