What is an Income Share Agreement?

Lidia Staron, author at OpenLoans
Lidia Staron   OpenLoans Marketing Manager
Personal Finance
I enjoy navigating people through important financial decisions.

An income share agreement is an alternative type of funding and financing. The colleges that participate in this rely on getting a percentage of your future salary, and this way, they can make money back from their students in the future.

A lot of people opt for these instead of high-interest loans. College can be an option for some people who otherwise wouldn’t have been able to afford it without an income share agreement. With certain professions, it works out well for all parties, too. Depending on the agreements you make, and whether you go on to get a high-paying job or not, you may repay more or less than the amount that you borrow.

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College tuition and fees are tax-deductible, and many people who are looking for college expenses that are tax-deductible for parents will consider the ISA program.

How Do Income Share Agreements Work?

An income share agreement can work in a few different ways. An ISA program doesn’t have to stick to specific regulations, so all can be a little bit different depending on schools and colleges that offer these. They’re usually flexible, and because they depend on your earnings, they don’t put undue pressure on people who lose their jobs, either.

They usually work by providing monthly repayments, which is pretty standard for other forms of lending. It extends to the schools with income share agreements, too. It is vital to read the terms beforehand so that you are aware of what percentage you will be repaid. Normally, the college or school will ask for between two and 10 percent of your salary for a set period of time after you first get a job.

There are a few terms to understand before you go ahead with an ISA program.

Income Share Percentage

Learning about income share agreements.

The income share percentage refers to how much of your income you will need to be passed on to the school in question. Something like a five percent share is pretty standard, but they can be as low as two and as high as 10 percent. You might think that the income share percentage is all you should use to make your choice, but actually, there are plenty of other factors to think about.

Salary Floor

The salary floor is another term you will hear a lot in relation to borrowing using an ISA. The salary floor has to do with the expected income you will make after you graduate and go into the working world. When your salary reaches a certain level, you are expected to make repayments. So, if the salary floor is $40,000, this means that when your salary reaches this value, then you will need to start paying back on your ISA.

Payment Cap

A payment cap refers to the most you will need to repay. This cap is sometimes worked out based on how much money you receive. Often, it is just double the ISA amount received, so a $20,000 ISA would mean $40,000 as a cap on what you will repay. It is up to you to work out if this is comparable to personal loans for students.

A payment cap should be there for your protection, and repaying double what you initially borrowed is plenty, so watch out for any payment caps that were over twice what you initially borrowed. Some schools with income share agreements don’t offer caps, so this takes away some of the protection you have. If the payment cap is too high or there is no cap, then you should definitely think long and hard about it.

Repayment Term

Just like online personal loans, a repayment term relates to how long the money is borrowed for and how long it needs to be paid back. So if the repayment term is seven years, this means that your ISA program will require you to pay back for this length of time.

Unlike some debts like personal loans for bad credit, repaying quicker is not an option. With an ISA, you are going to be paying a percentage of your salary for the period of time agreed.

So, what is normal for a repayment term? There are examples of ISAs that vary between two years and 10 years. Normally, the smaller percentages last longer, so you might be paying them back for 10 years in this scenario.

Students View of Income Share Agreements

Students having a fun time studying.

It is impossible to know what the outcome of an income share agreement is going to be. Will the rates end up being competitive with personal loans for students? Nobody knows what job they will be getting and what their income will be when they get it. It is impossible to know what you will repay.

That said, for a student, it means that your investment will be tied to the job you get, so if you go on to get a high-paying job, you might not miss the money quite as much as if you are trying to make ends meet and the ISA takes 8% of your salary for a decade.

For a student, it is often appealing as it feels like you are paying with money that doesn’t really exist yet, or is at least hypothetical to your own personal finances. Economically, it makes sense and means that if you aren’t earning in the future, then nobody is going to be knocking down your door for the money. In this respect, an ISA is a flexible form of financing for your university degree. Its repayment will be directly tied to how much your degree helps you to bring in.

Is an Income Share Agreement a Good Option for You?

Without looking at the specific details of the income share agreement, it is very difficult to say whether it is a positive or a negative thing. Make sure you fully understand all of the different terms and read up about the school or college you are considering.

An income share agreement can provide an alternative to traditional forms of lending.

One massive plus point is that you can guarantee that you are only going to be repaying the money for a set period of time. You don’t need to worry about student loans or other personal loans spiraling out of control and causing financial stress decades into the future. Neither should you worry about your credit score and loan application. Your lending is dealt with quickly, and because it will be a portion of your future salary, you don’t need to worry about whether or not you can afford it right now.

If there are scenarios where you don’t get the same fortune with the jobs market, or you end up worrying about whether you are earning enough, you might end up repaying less than you actually borrowed in the first place. There are examples of people borrowing $20,000 but only having to repay $15,000 under the terms of the ISA.

Why You Should Be Careful | The Negatives of an ISA

Student weighing his options.

It isn’t all fantastic and flexible. For some people, an ISA can actually cost them more in the long run. Some borrowers may end up in a very high-paying job, having committed to pay 8% of their salary for 10 years. This could end up being a really significant amount of money. If you were to then compare other forms of borrowing, such as personal loans, then you would see that some of the other student loans and financial agreements might have left you wealthier in the long run.

That said, you are still supporting an educational establishment.

Another reason a lot of people don’t like the ISA is the fact that there isn’t necessarily any flexibility in paying it back. It’s not like you can pay more off if you make more and then cut repayments when you have to spend on other things or have higher tax bills to pay.

There is no cap on what you agree to pay. If the percentage point of your agreed repayments is high, this could be a sign that the particular income share agreement in question is not ideal for you. It is more likely that you will find it harder to pay back and lose out in the long run.

Conclusion

An ISA is a very individual decision to make, and the number one key to making this decision is working out whether it suits your own unique scenario or not. There is always some sort of risk with entering an agreement like this, but because of the fact that it is intrinsically linked to your salary, you don’t have to worry about times when you are not earning.

Some people will get more out of income share agreements than others, but there’s a chance they might be a good solution for you.

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