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What Is an Income Share Agreement?

Student loans are the enemy of every college grad in the United States. Don’t believe us? Just ask the 45 million Americans out there carrying the burden of student loan debt.1

Yep—There’s a student loan crisis in America. Even universities are starting to see the need for alternative ways to pay for education.

To “combat the burden” of student loan debt, schools are starting to offer something called an income share agreement. And while income share agreements are being advertised as an affordable, smart alternative to student loans, they’re really no different. A loan is a loan . . . is a loan. No matter what you call it.

What Is an Income Share Agreement?

An income share agreement (ISA) is an agreement between a student and a college or university that helps fund the student’s education. Here’s how it works: The school covers a portion of the student’s expenses for tuition and room and board—up to a certain amount—while the student is enrolled. In exchange, the student agrees to fork over a percentage of their salary to the university after graduation (for years to come).

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When it comes time to uphold your end of the income share agreement, the amount you pay back out of each paycheck (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 will kick in and take a bigger (and bigger) chunk of your income.

And if that’s not bad enough, ISAs usually aren’t meant to replace traditional federal student loans. They’re targeted at students who have already taken out as many federal loans as possible and still need more funding. That’s right—ISAs are debt on top of debt.

Most universities say ISAs are a great alternative to taking out private student loans (which charge higher interest rates than federal loans). But let’s face the facts: If you have to “borrow” money from anyone (for any reason), by definition, you’re in debt. And since you have to pay it back under certain terms, it’s still a loan.

How Do Income Share Agreements Work?

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

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. The math still works out in their favor—meaning you often pay more than what they gave you to begin with. A lot more.

Before we dive in, you should know that income share agreement terms vary from school to school. And the annual percentage rate you pay depends on four things:

  1. Your major
  2. How much you borrow
  3. The length of your term
  4. The payment cap

So, how exactly does this work?

Let’s say you want to get a cybersecurity degree at Purdue University and you borrow $10,000 through their ISA program. According to their Comparison Tool, you can expect your income share percentage rate (the percentage of your income you’d hand over after graduation) to be 3.84% for 92 months.2

That means if your salary is $50,000, then you’d send around $160 of that back to your university every month for over seven and a half years!

Now let’s say you work really hard and get a promotion and a raise after a couple years—now you’re going to pay even more money because your payment is a percentage of your income. So when you make more, you pay more. The only way your payments stay the same is for your income to stay the same. That means you’d have to turn down all raises, promotions and better job opportunities for seven and a half years.

And based off your terms with the Comparison Tool, you stop paying when you’ve:

  • Made 92 payments
  • Reached the payment cap of your agreement ($23,100)
  • Or reached the end of the payment window (152 months).

So . . . how is this any better than a student loan? Sadly, it’s not.

Is an Income Share Agreement Right for You?

When you’re in high school thinking about your future, your plans probably include getting a college degree. But a college degree is expensive. That’s why most people assume there’s no other way to pay for college than with student loans. (Listen: That couldn’t be further from the truth.)

So, when you hear about the income share agreement, you’re all ears. It’s new, shiny and an alternative to student loan debt—right? Plus, there’s no interest! If this sounds too good to be true . . . that’s because it is.

Get this: The average cost of just one year of college can range anywhere from $26,820 for a public, in-state university to a whopping $54,880 at a private university.3  That includes everything . . . not just tuition and fees. But if you’re sweating right now, we don’t blame you. The price of an education in America is high.

Typically, income share agreements will only loan you up to 15% of what your projected salary will be.4 That means you’ll probably feel pressured to take out other student loans to cover the leftover costs of a college education. So, not only will you have an income share agreement to worry about, but you have a student loan or two on top of it! Just what every new college graduate needs, right?

Are Income Share Agreements a Bad Idea?

Income share agreements are a bad idea. And not only are they a bad idea, but you could also end up paying more post-graduation than with another type of alternative funding.

And remember: An ISA typically isn’t meant to replace federal student loans, so let’s take a look at how it stacks up against a Parent PLUS loan and a private loan.

Loan Type

Parent PLUS

ISA

Private

Interest Rate

6.28%

3.84%

9%

Repayment Term

120 months

152 months

120 months

Loan Fees

4.228%

N/a

N/a

Total Repayment

$16,815

$18,386

$19,419

 

With an income share agreement, the interest rate is quite a bit lower than the private or Parent PLUS loans . . . but the repayment term is a lot longer.

So, if you choose to fund your education with that “non-debt alternative,” you’ll end up paying more than one of the major student loan options.5

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 of at least $20,000 (it’s listed in your ISA terms). But if you scored your dream job (with great pay) right out of college, they’ll start collecting on your ISA as soon as your grace period ends.

This doesn’t seem like a great incentive to go after that dream job with the high-paying salary, does it?

Listen: An income share agreement is just putting a different kind of bandage on the same gaping wound of $1.57 trillion of student loan debt.

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 either way? Well, college isn’t for everyone. But for those of you who do need a degree to get to where you want to go, we have good news: You don’t have to take on student loans or debt of any kind. Between scholarships, grants and good, old-fashioned hard work, you can cash flow your college degree! But how?

1. Look at in-state schools or community colleges.

Remember, a degree is a degree. All that matters is that you have one and worked hard for it. You don’t have to go to the Ivy League school to be successful in your career. And you don’t have to go to a private (read: expensive) college to get to where you want to go. Look at in-state schools and even consider going to a junior or community college for the first two years to save money.

2. Start saving now.

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.

3. Apply for grants and scholarships.

If you’re stressed about how to put yourself through college debt-free, believe it or not, there are options. Make sure you’re applying for scholarships every chance you get—it’s free money!

4. Start working early.

Get a job as soon as possible. We know, we know . . . That sounds like a lame idea, especially when all you want to do is enjoy your high school years. But believe us, the sooner you get to work (and the sooner you start saving), the easier it will be to pay for your college education. Now is the time to start making wise decisions with your money!

5. Get on a budget.

A zero-based budget, that is. When you do a budget every month (before the month begins), you’ll have total control of where your money is going so you can stay on top of your savings 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 The Graduate Survival Guide.

Cash Flow College and Keep Your Income

We’re not going to lie to you. Cash flowing four years of college is going to be hard work. But it’s worth it. Especially when you’re on the other side of that degree, making a good income—and keeping it.

Just think about how great it will be to walk across that graduation stage with a diploma and a great paying job—without the weight of student loans holding you down. Not only that, but you’ll also be able to start your first “real-world” job without worrying about having to give most of your income away. You won’t be paying it to the government or your university years after the fact. Everything you earn is actually yours. Nice, huh?

We get it: Trying to pay for college out of pocket can be overwhelming at first. 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 from day one—just tackle it semester by semester.

Work, save up your money, and cash flow your degree one dollar at a time. You can do this!

Want to learn more? Watch our new documentary, Borrowed Future: How Student Loans Are Killing The American Dream. We’ve uncovered the dirty truth behind the student loan industry and how it’s built to work against you. And the more you know, the easier it will be to keep your name off the dotted line of those student loan agreements.  

 

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.

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