Income-Share Agreement (ISA) Definition - Investopedia

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What Is an Income-Share Agreement (ISA)?

An income-share agreement (ISA) is a form of college financing where repayments are based on a student’s future income. An ISA provider gives the student money to pay for college, and the student contractually agrees to pay the provider a percentage of their salary for a set period of time.

With most ISAs the income-share rate is anywhere from 2% to 10% of the student’s future salary. That means when their salary rises, so does the ISA payment. However, the repayment term and total repayment amount are capped.

Unlike student loans, ISAs do not accrue interest, but many students do end up paying back more than the original amount that they borrowed. Most ISAs do not require a cosigner or good credit, so they are more attainable for some students than other types of financing.

Key Takeaways

• An income-share agreement is a contract through which a student receives upfront money for college in exchange for a fixed percentage of their future income.
• Income-share agreements are not widely available, but some can be had through universities, career schools, and private lenders.
• A recent study from the Student Borrower Protection Center uncovered evidence of racial disparities in the ISAs offered by Stride Funding, Inc.

How Income-Share Agreements Work

The concept of using an ISA to pay for college was first introduced in an essay by Milton Friedman in 1955. Friedman claimed that debt is an inappropriate way to finance education. Instead, he suggested using a method similar to investing in the stock market, where the amount of a lender’s payment is determined by the student’s success—just as a shareholder benefits when a corporation grows.

With student loan debt at all-time highs, ISAs are slowly gaining popularity among students. In 2019, more than $250 million in ISAs were originated, with an additional $500 million expected in 2020 before the COVID-19 pandemic. However, unlike student loans, ISAs are not widely available. Most ISAs are offered through four-year colleges or universities, coding bootcamps, or other career schools and private lenders.

The most well-known ISA is Purdue University’s “Back a Boiler” program, which bases its income-share rate on the student’s field of study. ISAs for higher-paying college majors, such as chemical engineering, typically have a lower rate and a shorter term than those offered to students in lower-paying majors. Coding academies (career schools that teach computer programming) have also started to offer ISAs as a form of financing. As these schools are typically unaccredited, they are not eligible for federal financial aid. One example is Lambda School, where graduates aren’t required to make payments until their salary reaches $50,000.

ISAs are also offered through a few private lenders. Stride Financial, a private ISA financier, provides students up to $25,000 in funding per school year, which is disbursed directly to their college. Rates are calculated based on a student’s major, which school they attend, and when they expect to earn a paycheck.

ISAs do not accrue interest and generally have a fixed-term repayment period. However, they are also not subject to consumer protection law.

Advantages and Disadvantages of ISAs

ISAs can be appealing to borrowers because they don’t accrue interest and have a set repayment period. That said, the market for ISAs is largely unregulated by the federal government and the states, which can be risky for borrowers. ISA proponents argue that the agreements are neither a loan or credit, which means they would not be subject to consumer protection law. However, there is disagreement about that; much remains to be determined.

According to the Student Borrower Protection Center (SBPC), issuers of ISAs may engage in the following practices that can harm student borrowers.

• If a borrower defaults, an ISA provider may use harsh collection activities, such as charging high fees and setting off the debt against the borrower’s state tax refund.
• In most cases, ISAs are used to provide funding after a student has already exhausted their federal student aid, which could lead to excessive debt after graduation.
• A student’s income share amount is determined by their field of study, which leaves room for discrimination, as races, genders, and national origins may be associated with certain college majors.

Racial Disparities and ISAs

A recent study from the SBPC found evidence of racial discrimination by Stride Funding, Inc., a private ISA lender. Stride Funding considers a borrower’s school and field of study when determining their income-share rate, two factors that are closely associated with race.

Data revealed that students who attended historically black colleges and universities (HBCUs) paid more for a Stride Funding ISA product than students from comparable non-HBCU colleges. For example, a computer science major attending Tuskegee, an HBCU, was quoted $2,802 higher for a $10,000 ISA than a student with the same major attending Auburn. The study found similar disparities among students who attend other minority-serving institutions (MSIs), such as Hispanic-serving institutions (HSIs).

Students should carefully consider all of their options when borrowing money to pay for college. It’s important to consider the total payback amount and compare that with the amount a student loan would cost. Whether or not an ISA is a good option to pay for college depends on the student and their individual circumstances.

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