Using an Income-Share Agreement to Pay for College

After his family’s finances took a downward turn, Casey Popp needed to find another way to pay for college during his sophomore year.

Until then, “I had a couple of scholarships and some standard [federal] loans and a lot of financial monetary support from my parents,” says Popp, a Chicago native. “We were in a good place, and then that changed where that wasn’t the case anymore, so I needed to find some other options.”

The 22-year-old, who completed his bachelor’s degree at Purdue University–West Lafayette in Indiana this year, says he used his school’s income-share agreement program to finance his education as an out-of-state student.

Income-share agreements, known as ISAs, are students’ contracts with colleges to pay a percentage of their future earnings for a fixed period after graduation in exchange for funds to pay for their education.

[Read: Alternative to Student Loans: Income-Share Agreements.]

Between his federal student loans and Purdue’s ISA program, Popp took out around $38,000 to pay for his studies in corporate communications and psychology; he says roughly a third of the amount he borrowed was through the ISA program.

“[ISAs] are a good option to look at because there’s no interest rate. So the amount you see is the amount you’re going to pay,” Popp says.

Purdue was the first school among four-year institutions to introduce an ISA program. Under the school’s Back a Boiler program, which started in 2016, students who exhaust federal loans can fund their education with an agreement to sign over a share of their future income, typically between 3 to 4 percent for up to 10 years after they graduate; repayments are capped at 2.5 times the initial funding for the ISA.

While ISAs don’t charge interest, that doesn’t mean students will repay the exact amount they borrow. That’s because an ISA repayment rises and falls based on students’ incomes during a prearranged period.

For instance, a Purdue junior who is studying elementary education and accepts $10,000 in ISA funds may be expected to pay off the amount at nearly 5 percent of his or her income for the next nine years. The program assumes that the student will earn around $31,000 as a starting salary in education. If the graduate’s salary remains the same for more than nine years, he or she will pay the university slightly more than $14,900 under the agreement — that’s about $4,900 more than the initial funding.

Since 2016, colleges and universities that have launched ISA programs include Colorado Mountain College, Allan Hancock College in California, Lackawanna College in Pennsylvania, Clarkson University in New York, Norwich University in Vermont and Messiah College in Pennsylvania. ISAs are typically funded by the school or by investors, and terms vary among colleges and universities.

Eligibility to participate in an ISA at one these institutions varies since each school sets its own rules.

“There will be a day when many schools use income-share agreements very similarly,” says Tonio DeSorrento, CEO of Vemo Education, a Virginia-based company that helps colleges and universities design and implement ISAs.

[Read: Some Colleges Choose to Slash, Freeze Tuition.]

DeSorrento says some schools offer ISAs as a form of financial aid to help students “come there and stay there,” since the cost of college can exceed the federal student loan limit for undergraduates; the maximum amount most undergraduates can take out in subsidized and unsubsidized direct loans is set at $31,000 by the Department of Education.

At Messiah College, students who opt for the school’s ISA will pay between 3 and 3.5 percent of their future income for a set period of time. Payments are waived if a graduate’s salary drops below $25,000 a year.

Other schools design their ISA agreements to target specific segments of their student population. At Norwich University, ISA agreements are only available to students who would have relied on the now-defunct federal Perkins loan program and/or undergrads who have exceeded four years of institutional aid, grants that help reduce the cost of attendance.

Norwich CFO Lauren Wobby says the military college introduced its ISA to reduce financial barriers and increase degree completion.

While ISAs are often criticized for being unregulated and untested, more four-year institutions are expected to roll out these types of agreements, higher education experts say. Consumer advocates warn that the federal government needs to establish a cap on the terms that ISA providers can charge students as well as clarify legal uncertainty since these types of agreements are new to the marketplace.

“We do feel like we’re at the front end of this new initiative in our industry, but I have a feeling that these are going to catch on and these are going to be very mainstream,” Wobby says.

Here are a few instances when students might consider using an ISA to pay for college.

[Read: What to Know About Employers That Pay Student Loans.]

You don’t qualify for federal financial aid. The U.S. Department of Education only disburses federal financial aid, which includes forms of college funding like Pell Grants and undergraduate direct Stafford loans, to U.S. citizens and eligible noncitizens, such as refugees and green card holders. Students who are eligible for the Deferred Action for Childhood Arrivals program, known as DACA, don’t qualify. For that reason, experts say ISAs can help DACA students with higher-education costs.

“ISAs are a good option for DACA students since they don’t qualify for federal student loans and often can’t qualify for private student loans” says Mark Kantrowitz, a student loan expert and publisher of Savingforcollege.com. “Institutional loans and other financial aid from the college are often their only option.”

Earlier this month, Colorado Mountain College, a four-year Regional College, announced its creation of an income-share agreement fund aimed at DACA students. CMC students who are DACA recipients can receive up to $3,000 per year through the Fund SueƱos program. Payments begin six months following graduation and only when the CMC grad is earning at least $30,000 annually. A recipient making $30,000 annually can expect to pay $100 per month under the ISA for up to 60 months, according to the college’s website.

You need to cover gaps in financial aid. Some schools offer ISAs as an alternative to private loans or high-interest Parent PLUS loans.

“If a parent was needing to take out a parent PLUS loan to send their student to school, the student could take out the income-share agreement to pay for their school funding. It’s more of a shift — it’s equity instead of debt,” says Mary-Claire Cartwright, program manager for Purdue’s ISA program. “It allows the student to fund themselves on their own potential other than the parents’ FICO score.”

While ISAs are meant to be an alternative to some types of student loans, experts say students should exhaust their federal student loan options first.

“Always borrow federal first. Federal student loans are cheaper, more available and have better repayment terms than private student loans and ISAs,” Kantrowitz says.

With federal student loan repayments, students can choose repayment plans like Pay As You Earn, which ties monthly payments to borrowers’ income levels. Additionally, students expecting higher post-graduate salaries may find that private student loans offer better terms.

Kantrowitz advises: “Students should consider whether to use ISAs instead of private student loans on a case-by-case basis. For example, consider the percentage of income that will be required and your career goals to determine whether an ISA or a private student loan will be less expensive.”

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.

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