Income Share Agreements in the United States: A Comprehensive Guide
As college costs continue to rise, many students are turning to income share agreements (ISAs) as a way to finance their education. In this article, we’ll explore what ISAs are, how they work, and some of the pros and cons of using them to pay for school.
What is an Income Share Agreement?
An income share agreement is a type of financial agreement where a student receives funding for their education in exchange for a percentage of their future income. Essentially, the student is trading a portion of their future earnings for funding today.
How do ISAs work?
ISAs typically work like this: Instead of paying tuition up front, a student agrees to give a percentage of their income to an investor for a set period of time after graduation. The percentage varies, but is typically between 3% and 10% of the student’s income for anywhere from 5-15 years, depending on the terms of the agreement.
For example, let’s say a student takes out an ISA for $50,000 to pay for their education. The agreement might stipulate that the student will pay back 8% of their income for the next 10 years. If the student graduates and starts earning $60,000 per year, they would pay back $4,800 per year until the 10-year term is up.
Pros and Cons of Income Share Agreements
There are several advantages and disadvantages to consider when deciding whether to use an income share agreement to pay for your education. Here are a few things to keep in mind:
Pros:
– No up-front costs: Unlike traditional student loans, ISAs don’t require any money up front. This can be a huge advantage for students who can’t afford to pay tuition out of pocket.
– No interest: Since ISAs aren’t technically loans, they don’t accrue interest. This can save you thousands of dollars in the long run.
– Flexibility: Because ISA payments are based on your income, they can be more flexible than traditional loans. If you fall on hard times, your payments will be reduced accordingly.
Cons:
– No forgiveness: Unlike some traditional student loans, you can’t have an ISA forgiven through bankruptcy or other means. You’re on the hook for the full amount, even if your income doesn’t meet expectations.
– No cap: Unlike traditional loans, there’s no cap on how much you could end up paying back with an ISA. If your income skyrockets after graduation, you could end up paying back far more than you would have with a traditional loan.
– Uncertainty: Since ISA payments are based on your income, there’s some uncertainty about how much you’ll end up paying back over time. This can make it difficult to plan your finances and budget effectively.
Conclusion
In conclusion, income share agreements can be a useful tool for students looking to finance their education. However, it’s important to carefully consider the terms of any agreement before signing on the dotted line. Make sure you understand how much you’ll be paying back, for how long, and what your options are if you run into financial trouble down the line. With careful planning and a bit of research, ISAs can be a smart way to pay for college without breaking the bank.