An income share agreement (ISA) is a type of college financing in which you repay the funds you receive using a fixed percentage of your future income. While ISAs can be useful for some students who lack other funding options, it’s important to fully understand how these agreements work, since you can potentially end up owing a lot more than you borrow.
Read on for a closer look at income share agreements, including their pros and cons, who might consider them, and how they compare to other types of college financing.
What Is an Income Share Agreement?
With an income share agreement (ISA), you receive money to pay for college and contractually agree to pay it back using a fixed percentage of your post-graduation income for a set period of time. ISAs are offered by some colleges. They are also offered through several private lenders.
The income percentage and terms of an ISA will vary depending on the lender. Typically, the repayment percentage will range between 2% and 10% of the student’s future salary, and terms can be anywhere from two to 10 years.
Unlike other types of student loans, ISAs do not accrue interest. However, students commonly end up paying back more than the original amount that they borrowed.
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How Income Share Agreements Work
Typically, you start repaying an ISA after you leave school and pass a specific income threshold, often $30,000 to $40,000 per year. If you earn less than the threshold in any month, you can waive your requirement payment that month. Some ISAs will count months in which you earn less than the minimum salary toward your repayment term, while others will extend the length of your loan.
You can typically exit your ISA at any time, provided you’re willing to pay the maximum repayment cap for your plan upfront.
With an ISA, your payment rises when your salary rises. However, the repayment term and total repayment amount are usually capped. The cap is the most you’ll have to repay under your ISA. With many plans, though, the cap can be as high as two (or more) times what you borrowed.
Income Share Agreement Example
To illustrate how an income share agreement might work, let’s say you sign an ISA agreement for $10,000 with the maximum number of monthly payments of 88, an income percentage of 4%, an income threshold of $30,000 (or $2,500 per month), and a payment cap of $23,000.
In this case, you would pay 4% of your income for any month you earn at least $2,500 and continue to do so until you make 88 payments or pay a total of 23,000 — whichever comes first. If you only earn the minimum, you will end up paying back $100 a month for 88 months for a total repayment of $8,800 (which is less than what you borrowed). However, if you make $55,000, you’ll pay $183 per month for 88 months, for a total repayment of $16,133, which is $6,000 more than you borrowed.
Keep in mind that the income percentages, terms, and repayment caps can vary considerably from one ISA provider to the next.
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The Advantages of Income Share Agreements
Some of the pros of income share agreements include:
• ISAs typically do not require a cosigner or good credit, so they can be easier to qualify for than other types of financing.
• Payments won’t exceed a certain percentage of your monthly income.
• Your ISA contract could expire years earlier than a traditional student loan.
• Schools that offer ISA programs are incentivized to help you earn the highest paying jobs.
• Depending on your future income, you may end up paying less than you would pay with a traditional student loan.
💡 Quick Tip: Even if you don’t think you qualify for financial aid, you should fill out the FAFSA form. Many schools require it for merit-based scholarships, too. You can submit it as early as Oct. 1.
Potential Pitfalls of Income Share Agreements
There are also some significant cons to ISA loans that you’ll want to keep in mind:
• In some cases, the ISA provider will cap payment more than twice the amount you receive.
• Unlike other types of student loans, there’s uncertainty regarding how much your loan will cost.
• In many cases, an ISA could cost more over the long run when compared to federal or private student loans.
• Income-driven repayment plans are already an option with federal student loans, and federal loans also offer the potential for student loan forgiveness.
• ISAs are not widely available and may be restricted to certain majors or programs.
Who Should Consider An ISA?
Income share agreements can end up being costly, especially if you enter a high-earning field and the ISA has a high payment cap. However, you might consider looking at ISA if:
• You’ve maxed out federal loan options but are unable to qualify for private student loans.
• You have a poor credit score and would receive high rates on student loans.
• Your school offers an ISA with reasonable terms and a low payment cap.
• You’re planning to earn a degree in a field that doesn’t have steep salary growth potential.
If these scenarios don’t apply to you, you’re likely better off using federal student loans to pay for higher education, or even private student loans if you have good credit. Before signing up, you’ll want to compare your options side by side and run the numbers to see which is the better deal.
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Considering Private Loans
You generally want to exhaust all your federal options for grants and loans before considering other types of debt, but if you’re looking to fill gaps in your educational funding, it may be worth considering private student loans before signing an ISA.
Private student loans are only offered through private lenders, and come with either fixed or variable rates. For borrowers with excellent credit, rates may be relatively low. Unlike federal loans, however, undergraduate private student loans often require a cosigner. The cosigner is an adult who agrees to take full responsibility for your student loans if you default. Cosigners are almost always required by private lenders since undergraduates have not had much time to develop a credit history.
If you expect to have a high salary after graduation and/or can qualify for a low rate on a private student loan, you could end up paying less than you would for an ISA.
An income share agreement, or ISA, is an agreement between the borrower and the school or a lender that states the borrower will receive funds to pay for college and then repay those funds based on a certain percentage of their future salary for a set amount of time.
While ISAs may sound like a different type of college funding, they are, essentially, loans. And in many cases, you will end up paying back significantly more than what you borrow.
Generally, you would only want to consider ISAs after exhausting any undergraduate federal student loans and aid available to you. It’s also a good idea to compare ISA offers with traditional private student loans before deciding on the best funding option for your situation.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
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