Income-share agreements (ISAs) are a new type of student loan that are becoming increasingly popular. ISAs are different from traditional student loans in that borrowers do not have to repay a fixed amount of money each month. Instead, they repay a fixed percentage of their income over a set period of time.
ISAs have a number of advantages over traditional student loans. First, ISAs can make college more affordable for students, especially those who come from low-income families. Second, ISAs can help students to avoid the burden of debt after graduation. Third, ISAs can help students to choose careers that they are passionate about, even if those careers do not pay the highest salaries.
How do income-share agreements work?
When a student takes out an ISA, they agree to repay a fixed percentage of their income over a set period of time. The percentage of income that the student repays is typically between 5% and 10%, and the repayment period is typically between 5 and 10 years.
If a student’s income is below a certain threshold, they will not have to make any payments. This is known as the “income floor.” If a student’s income is above the income floor, they will make payments based on their income.
If a student’s income is below a certain threshold for the entire repayment period, the ISA may be forgiven. This is known as the “income cap.”
Benefits of income-share agreements
There are a number of benefits to income-share agreements, including:
- Affordability: ISAs can make college more affordable for students, especially those who come from low-income families. This is because ISAs are based on income, not on the cost of tuition.
- Reduced debt burden: ISAs can help students to avoid the burden of debt after graduation. This is because ISAs are repaid over a set period of time, and the payments are based on income.
- Career flexibility: ISAs can help students to choose careers that they are passionate about, even if those careers do not pay the highest salaries. This is because ISAs are repaid over a set period of time, and the payments are based on income.
Drawbacks of income-share agreements
There are a few drawbacks to income-share agreements, including:
- Risk of default: If a student’s income is low for a prolonged period of time, they may default on their ISA. This could damage their credit score and make it difficult to borrow money in the future.
- Lack of transparency: The terms of ISAs can vary widely, and it can be difficult for students to compare different ISAs. It is important for students to carefully read the terms of an ISA before signing it.
- Potential for exploitation: Some critics have argued that ISAs could be used to exploit students, especially those who are from low-income families. It is important for students to do their research and choose a reputable ISA provider.
How to choose an income-share agreement provider
If you are considering taking out an ISA, it is important to choose a reputable provider. There are a number of factors to consider when choosing an ISA provider, including:
- The terms of the ISA: It is important to carefully read the terms of an ISA before signing it. Make sure to understand the percentage of income that you will repay, the repayment period, the income floor, and the income cap.
- The reputation of the ISA provider: It is important to choose an ISA provider with a good reputation. You can read online reviews and compare different ISA providers before making a decision.
- The cost of the ISA: ISAs typically have a fee that is charged to the student. It is important to compare the fees of different ISA providers before choosing one.
Conclusion
Income-share agreements are a new type of student loan that can offer a number of advantages over traditional student loans. However, it is important to weigh the benefits and drawbacks of ISAs before taking one out. It is also important to choose a reputable ISA provider.
If you are considering taking out an ISA, I recommend that you do your research and talk to a financial advisor.