Income share agreements are an alternative to student loans in which the borrower agrees to pay a percentage of their income for a specified number of years after graduation. Income share agreements are also known as ISAs. The total payments under an income share agreement may be higher than the total payments under federal and private student loans.
Example of a typical income share agreement
A typical ISA might involve a student agreeing to pay 0.4% of income for 10 years after graduation for each $1,000 received from the lender. So, if the student receives $30,000, they agree to repay 12% of their income for 10 years. If the student has a starting salary of $50,000 per year and receives 3% annual raises, the total payments will be $68,783, or 2.3 times the amount received. That’s the equivalent of a 19.6% interest rate on a student loan with level repayment over a 10-year repayment term.
The repayment obligation may be temporarily suspended if the borrower’s income drops below a threshold. This benefits the borrower, by suspending the payments during periods of economic hardship, similar to the deferments and forbearances on traditional student loans. It also benefits the lender, by suspending payments during periods of unemployment and underemployment, when the payments would be lower.
Similarities between ISAs and income-driven repayment plans
Income share agreements are similar to the income-driven repayment plans available for federal student loans.
Under the Pay-As-You-Earn repayment plan, the borrower’s monthly payments are equal to 10% of discretionary income, which is the amount by which adjusted gross income (AGI) exceeds 150% of the poverty line. The monthly payments are also capped at the amount they would be under standard 10-year repayment.
The remaining debt under the Pay-As-You-Earn repayment plan is cancelled after 20 years in repayment. If the borrower pursues public service loan forgiveness, the remaining debt may be cancelled, tax-free, after 10 years of payments.
History of income share agreements
Milton Friedman, the Nobel laureate, first proposed the idea of human capital investments in 1955.
Yale University implemented a cohort-based version of income share agreements, called the Tuition Postponement Option, from 1971 to 1978. After receiving many complaints from alumni, Yale University cancelled the repayment obligation for all borrowers in 1999.
A company called iempower (later My Rich Uncle) offered ISAs starting in 2000, but switched to making private student loans when it became clear that ISAs would be regulated like loans. Investors also had concerns over the cash flow characteristics of ISAs, since there was little data about how ISAs would perform over time.
Michael Robertson, founder of MP3.com, established an ISA called the Robertson Education Empowerment Foundation (REEF) as a revolving loan fund at UC San Diego in 2002.
A company called Lumni Inc. started offering ISAs in South America, starting with Chile in 2002, Colombia in 2005 and Mexico in 2007, before offering them in the U.S. starting in 2011.
A company called Cumulus Funding started offering ISAs in 2011. They changed their name to Align Income Share Funding in 2017.
The Highlander student newspaper at the University of California Riverside introduced the FixUC proposal in 2012 to replace tuition and fees with an ISA. The proposal was never implemented.
13th Avenue Funding funded a pilot ISA at Allan Hancock College in California in 2012.
Vemo Education was founded in 2015 to implement ISAs and worked with Purdue University (Indiana) to introduce the Back a Boiler program in 2016.
Since then, Lackawanna College (Pennsylvania), Clarkson University (New York) and Norwich University (Vermont) have announced plans to introduce ISAs.
Legislative proposals
The Oregon legislature enacted legislation in 2013 to explore ISAs (called Pay It Forward) with a goal of replacing public college tuition with ISAs. The proposal was never implemented.
Sen. Marco Rubio (R-FL) and Rep. Tom Petri (R-WI) introduced the Investing in Student Success Act (S. 2230) in 2014. The legislation was reintroduced in 2015 (S. 2186) and 2017 (S. 268), but was never reported out of committee. The legislation asserts that ISAs are not a form of debt, but also excepts them from bankruptcy discharge by declaring them to be qualified education loans and waives state usury laws. The legislation would establish minimal requirements for ISAs, such as a maximum repayment period of 30 years, a cap on the repayment percentage at 15% and a minimum income exception of $10,000. The legislation would also exclude ISA payments from the individual’s gross income for federal income tax purposes.
Is an ISA a loan?
Proponents of ISAs try to maintain a fiction that ISAs are not loans. Some even claim that ISAs are the solution to the student debt crisis. They argue that since the borrower is not required to repay the amount borrowed, it cannot be a loan.
But, an ISA is a loan, in that the recipient of funds makes payments for a period of time to satisfy a contractual obligation. A borrower of an ISA pays a fixed percentage of income instead of a fixed dollar amount each month. But, the borrower of an ISA still has an obligation to make payments for a specified number of years. Thus, an ISA is just a different form of debt.
Disadvantages of ISAs
Regardless of whether an ISA is a loan or not, there are concerns about the potential for abuse of borrowers.
The total payments under an ISA may be many multiples of the amount received by the borrower, greater than the total payments required for a loan with a level amortization for the same repayment term. The ISA may be the equivalent of a loan with interest rates that violate state usury laws, especially for borrowers who get high-paying jobs after graduation, such as borrowers who graduate with degrees in STEM or healthcare.
ISAs are not fair to students who receive a small ISA or who have high income after graduation.
Depending on the design of the ISA, the ISA may use high-paying fields of study to subsidize low-paying academic majors. This may cause students who pursue more lucrative academic majors to opt out of the program, increasing the costs to other students.
In effect, an income share agreement may be a form of indentured servitude.
Advantages of ISAs
An ISA shifts the risk of failure from the borrower to the lender. If the student does not graduate or does not get a good job, the lender will lose money.
For this reason, low-income students do not fear ISAs the same way they fear debt.
However, lenders may respond to losses by increasing the price they charge on ISAs for borrowers based on the college attended, the field of study, geographic location, the student’s grade point average (GPA) and the number of years until graduation. There is also concern that lenders may practice a form of redlining, where they will refuse to make ISAs available to borrowers who are predicted to have lower income after graduation.
