Brianna McGurran is the Loans Analyst for Forbes Advisor. Most recently, she was a staff writer and spokesperson at NerdWallet, where she wrote "Ask Brianna," a financial advice column syndicated by the Associated Press. As spokesperson, she also con.
Brianna McGurran is the Loans Analyst for Forbes Advisor. Most recently, she was a staff writer and spokesperson at NerdWallet, where she wrote "Ask Brianna," a financial advice column syndicated by the Associated Press. As spokesperson, she also con.
Written ByBrianna McGurran is the Loans Analyst for Forbes Advisor. Most recently, she was a staff writer and spokesperson at NerdWallet, where she wrote "Ask Brianna," a financial advice column syndicated by the Associated Press. As spokesperson, she also con.
Brianna McGurran is the Loans Analyst for Forbes Advisor. Most recently, she was a staff writer and spokesperson at NerdWallet, where she wrote "Ask Brianna," a financial advice column syndicated by the Associated Press. As spokesperson, she also con.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Updated: May 6, 2024, 4:58am
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As outstanding student loan debt grows—nearly doubling from $896.8 billion in 2011 to $1.73 trillion in 2021, according to the Federal Reserve—students, colleges and lawmakers are searching for alternatives. Income share agreements (ISAs) are one such option: Instead of receiving a loan and paying it back with interest, students get funding for school in exchange for committing to pay a percentage of their future income.
ISAs may be attractive to students who are wary of taking on debt that could be unaffordable. But there’s strong debate about whether ISAs are a viable alternative to student loans, or whether they mimic many of the issues already inherent in student lending.
If you’re considering an ISA to fund your education, it’s key to understand just how ISAs function and how they compare to other higher education funding sources.
ISAs are built on the promise of your future earning potential. When you apply for an ISA, the provider looks at your college major and anticipated salary, and potentially GPA and age, to assess your eligibility. If you meet the requirements, you’ll be offered an award amount and terms that detail how much of your salary you’ll be expected to pay back and for how long.
For example, say you’re a business major and your anticipated starting salary is $55,000 per year. You receive an ISA from your school for $15,000, and you’re required to pay 5% of your income over 10 years. That 5% won’t change over the repayment term. But the overall amount you pay could change since your salary could go up or down over time.
Often, an ISA will have a minimum income threshold, so that you pay $0 if your income is lower than, say, $25,000 per year. It may also have a payment cap, which protects you from paying a very high amount if your income is substantially higher than expected.
ISAs are available from a range of tech bootcamp programs and also from a growing number of colleges and universities. One of the most well-known is Purdue University’s “Back a Boiler” program. If your school doesn’t offer ISAs directly, they’re also available from a small number of private entities including Better Future Forward and Lumni.
Since ISAs are a relatively new entrant in the college financing world, and are less regulated than student loans, it’s important to carefully consider whether they’re right for you. Here are the major benefits and drawbacks.
While the vocabulary used may differ, the core feature of ISAs and student loans is the same: The student must pay a portion of their income after graduation for a certain amount of time.
But the difference arises in the clarity of the expectation. Student loans come with a specific interest rate and repayment term, providing a set monthly payment the student can plan for. An ISA offers a fixed repayment period, but not a fixed monthly payment. A student can estimate how much they’ll pay in total for an ISA, but that amount can vary greatly depending on their earnings.
Another important difference is that ISAs do not come with the same protections that federal student loans do. Federal loan borrowers have the option to pause payments for up to three years through deferment or forbearance, and get loan forgiveness if they work in public service careers.
Federal loans also can be repaid through income-driven repayment (IDR) plans, which, like ISAs, tie monthly payments to the borrower’s income. But unlike ISAs, IDR plans allow borrowers to get the balance of their loans forgiven after 20 or 25 years of payments.
Also, some IDR plans limit the amount students have to pay per month to the equivalent of what they’d pay on the government’s 10-year standard repayment plan. That likely provides better protection against very high monthly payments than what ISAs offer.
In most cases, federal direct unsubsidized and subsidized student loans are the wisest borrowing option when paying for college. Only after you’ve reached the borrowing limit for these types of loans should you consider ISAs.
On the other hand, private student loans do not have the same consumer protections as federal loans, and ISAs may be a better alternative.
For example, private loans don’t offer IDR plans, and there are typically fewer options for lowering your monthly payment if you experience financial hardship. ISAs, however, generally lower your payment to $0 if your income dips below a certain amount.
Also, private loans have historically carried higher interest rates than federal loans. Rates are also based on your credit and income. So as a student, it’s difficult to get competitive terms on a private loan without a co-signer. Depending on your ISA contract, you could pay less overall than you would if you took out a private loan, and you wouldn’t need a co-signer to do so.
When comparing ISAs and private student loans, look closely at the interest rates and repayment terms you could qualify for. Compare them side by side and do your best to estimate how much you’d pay per month and over time with each option. Read your ISA contract carefully and understand: How your payments would be calculated; how long you’d pay the provider; what happens if you can’t pay; and any fees you’d be charged. ISAs are new for most students, so it’s OK to ask questions and make sure you feel fully confident in the route you decide to take.
