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Income Share Agreements: A Crazy Alternative to Student Loans

As soon as you land on a college campus, there’s a friendly financial aid rep encouraging you to sign up for $100,000 worth of student loans—just like that. It’s no secret that there’s a student loan crisis in America. The latest numbers show Americans currently owe over $1.5 trillion in student loan debt.1

To combat the burden of student loan debt, universities are starting to offer something called an “income share agreement.” Although it’s being flaunted as an affordable, smart alternative to student loans, it’s still just debt stealing from your income—literally.

What is an income share agreement?

Crazy enough, it’s exactly like it sounds. An income share agreement (ISA) is a contract agreement between a student and their school. The student agrees to receive borrowed money from the university to fund their education. In exchange, they agree to pay the university a percentage of their salary after graduation (for years to come).

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The amount you pay back (think minimum payment) will increase as your income increases. So basically, as you advance in your career field and begin to grow your salary, the income share agreement is going to kick in and take a bigger and bigger chunk of your income.

Most universities will try and say this is a great “alternative” to a student loan. But if you have to “borrow” money from anyone, by definition, you’re in debt and that’s a loan.

Over the past few years, well-known colleges and universities across the nation have jumped on this income share agreement train. And the trend keeps growing.

Let’s say you want to get a history degree at Purdue University and finance it through their ISA program. Using their Comparison Tool, a history major borrowing $9,000 a year would have an income share percentage rate of 4.52% over the next 112 months after graduation (or nine years and four months).2

No matter how you do the math, 4.52% of a $75,000 gross income is always going to be a lot more than 4.52% of a $30,000 gross income—so the amount you’ll be paying over time is guaranteed to increase. Instead of losing 4.5% of your income each month, you could be investing that 4.5% toward your 401(k)!

Most income share agreements boast that the percentage rate won’t change no matter how much money you make. But it doesn’t have to.

How do income share agreements impact you?

At first glance, an income share agreement might sound like a saving grace for a broke college student. You’re fed up with student loans and looking for an alternative . . . and in walks an income share agreement. It’s new, shiny and presented differently than student loan debt! Plus, there’s no interest! It sounds too good to be true, right? That’s because it is.

It should be noted that income share agreement terms vary from school to school. And the annual percentage rate you’ll pay depends on your major, how much you borrow, the length of your term, and the payment cap.

Here’s the deal: some income share agreements will only loan you up to 15% of what your projected salary will be.3 Which means you’ll probably feel pressed to take out some student loans to cover the leftover costs anyway. So, you now not only have an income share agreement to worry about, but you also still have a student loan on top of it! Great.

That’s because the average cost of just one year of college can range anywhere from $20,770 for a public, in-state university to a whopping $46,950 at a private university.4

Let’s say you didn’t receive any scholarships or grants, and your total cost at a state school runs at about $20,000 a year. That means your income share agreement needs to cover $80,000 for four years of undergrad.

Based on that average in-state university cost, an in-state student at Whatever U would pay about $10,000 for tuition and another $10,000 for room and board. So, since some schools cap their ISA “funding” at $10,000 a year, that definitely won’t be enough to get you through your entire collegiate career. If your income share agreement ends up being $10,000 for each of your four years, that’s a grand total of $40,000 borrowed.

That alone is a lot to process. But stick with us! You worked hard to get your degree in social services at Whatever U. After you graduate and start your job with a $30,000 average salary, your income share agreement requires 5% of your post-college income from each year you took out one of those $10,000 loans.5 That equals $1,500 a year for just one ISA, and $6,000 total for all four. Not to mention you’ll probably also be paying on student loans if you felt you had to take some out to cover the difference.

So, starting out, you’re only taking home $24,000 of your $30,000 salary. And after five years (because you’ve been working so hard), you get a raise up to $35,000—but now you’re losing $1,750 a year for just one ISA, and $7,000 total for all four. Congratulations, your $5,000 raise is now only $4,000! Wait, what?

That’s right! Throughout the length of your 10-year ISA contract, your ISA has taken a total of $65,000 from your $30,000–35,000 annual salary. You just paid $25,000 more than you initially borrowed.

Long-Term Effects of an Income Share Agreement

Some universities won’t come after their alumni to pay on their income share agreement until they’re making a decent salary.

But you have to wonder—will this delay college grads from starting the job hunt after college? On top of that, why would someone want to get promoted to a higher income if that just means more of their money is going toward paying back their income share agreement?

On the flip side, if a Whatever U alumnus lands an excellent job after graduation with a fantastic salary, they still have to fulfill the contract term. Which means Whatever U could be paid back up to $16,000 a year on an $80,000 average annual salary. For 10 years, that’s $160,000 if you only took out four $10,000 income share agreements.

Oh, that sounds just lovely.

An income share agreement is just putting a different kind of bandage on the same gaping wound of $1.5 trillion of student loan debt. With an ISA, there’s no real incentive to pay back more than you owe or to get yourself out of debt as fast as you can. Because the school wants to keep getting a percentage of your income as your income grows. So, what do you do now?

Alternative Ways to Pay for College

At this point you might be thinking, is college even worth it if you have to take on debt no matter what? Here’s the good news: You don’t have to take on student loans or debt of any kind. Between scholarships, grants and good, old-fashioned work, you can cash flow college! But how?

Remember, a degree is a degree. Look at in-state schools and even consider going to a junior or community college for the first two years.

If you’re a parent, now might be the right time to start saving for your child’s education with an Education Savings Account (ESA). An ESA allows you to save $2,000 (after tax) per year, per child. Plus, it grows tax-free! We teach you to tackle savings for your child’s education once you are debt-free and have saved up an emergency fund of three to six months of expenses.

If you’re stressed about how to put yourself through college debt-free, believe it or not, there are options out there. Make sure you’re applying for scholarships every chance you get—it’s basically free! Get a job and start saving money instead of spending your entire paycheck on expensive coffee, video games, and whatever sales pop up in your inbox.

Make a budget and stick to it to hit your goals. You can make a budget in as little as 10 minutes with our free budgeting app, EveryDollar. For even more tips on how to get through college on a budget and avoid making money mistakes, check out Anthony ONeal’s book The Graduate Survival Guide.

Cash-Flow College and Keep Your Income

We won’t sugarcoat it: Cash flowing four years of college is going to be hard work. Just think how great it will be to graduate debt-free and actually be able to keep your income! You won’t be paying it to the government or your university years after the fact. Everything you earn is yours.

Trying to pay for college can be overwhelming. But if you look at it one year at a time, it’s easier to come up with a game plan. You don’t need to scrounge up $80,000 to fund all four years—just tackle it semester by semester. Work, save up your money, and cash flow your degree. You can do this!

Want to learn more about how to go to school without loans? Debt-Free Degree is the book all college-bound students—and their parents—need to prepare for this next step. Grab a copy today or start reading for free to get plenty of tips on going to college debt-free!

The Graduate Survival Guide is the guide you need to avoid common—and costly—mistakes during college. Order your copy today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

New Student Loan Documentary

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Borrowed Future uncovers the dark side of the student loan industry and exposes how the system is built to work against you.
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Borrowed Future uncovers the dark side of the student loan industry and exposes how the system is built to work against you.
Watch Now