Income Share Agreements: What Students Should Know

The coronavirus pandemic sent shock waves through higher education, accelerating some trends and dashing others. One that some experts say has picked up steam in the last year is the availability and interest in income share agreements. This lesser-known way to pay for college requires students to give a fixed percentage of their future salary to a school in exchange for funds.

Tonio DeSorrento, co-founder and CEO of Vemo Education, a Virginia-based company that helps colleges and universities design and implement income share agreements, says the financial risks associated with a college education are becoming untenable for some.

“One trend that was already underway pre-pandemic was this shift from ‘Can I afford college?’ to ‘Is this worth it?'” DeSorrento says. “Schools that do some of their tuition with something like an income share agreement are communicating the value of what they have there differently from other schools.”

[Read: Is College Worth the Cost?]

Students facing a range of unknowns today, including a recovering but uncertain economy and job market, can be reassured by a college’s willingness to absorb some of their risk, DeSorrento says.

For example, students who participate in the newly minted ISA program at Robert Morris University in Pennsylvania — which provides up to $5,000 annually — pay nothing if their gross monthly income is below the annual equivalent of $25,000 after graduation. Graduates agree to a maximum of 84 payments within a period that lasts 10 years, after which the ISA obligation expires. Graduates who go on to earn higher salaries will still only pay a maximum of 1.8 times the total value of the ISA funding awarded during college.

But the details of these contractual agreements, including the percentage of future earnings due and student eligibility, can vary widely across the colleges that offer them.

Income Share Agreements Can Fill Financial Aid Gaps

To fill the gap between federal financial aid and the cost of college, families can turn to other funding sources like private student loans, parent PLUS loans and institutional aid. Income share agreements — which are not student loans — provide an alternative to these more common options.

[READ: How to Bridge a Financial Aid Gap This Fall.]

Typically, experts say students who face a small gap in funding, have exhausted all federal aid options or are nearing the end of their coursework and need a small amount of additional funding to push them over the finish line to graduation will benefit most from an income share agreement.

“Our ISA program was designed as an alternative to private and federal Parent PLUS loans to bridge student financing gaps once other funding sources — such as scholarships, Pell Grants or federally subsidized loans — are exhausted,” Mary-Claire Cartwright, Purdue University‘s ISA program manager and chief information officer at the Purdue Research Foundation, wrote in an email.

Students may also be attracted to the flexibility of an income share agreement, Cartwright says, over the fixed repayment terms of a student loan that often cannot be adjusted in cases of underemployment or unemployment. To determine which funding options make sense for an individual student, she says “a self-assessment of college major, career aspirations and life goals can be valuable.”

She says the university encourages students to do their research and compare options. As a safeguard, Cartwright says at Purdue, “each student must read about ISAs and are administered an ISA quiz they must successfully complete to demonstrate their knowledge and understanding of the program prior to receiving ISA funding.”

To make the right choice, students can calculate the maximum amount they would repay with an income share agreement and compare it with the amount they would pay through a traditional student loan. Students who anticipate high earnings and regular raises in the years following graduation — based on their area of study and anticipated career field — may find that they would ultimately pay more through an income share agreement than through a student loan, which can offer interest rates as low as 2.75% if borrowed from the federal government.

Plus, not all income share agreement terms offer competitive repayment rates, and details like the length of the repayment period or the existence of a cap on repayment can greatly tip the scales for some students.

“While an ISA isn’t the best fit for everyone,” Cartwright adds, “many students find an ISA works better for them than a traditional loan.”

Eligibility May Depend on a Student’s Major and GPA

Some income share agreements require students to meet certain academic and need-based requirements to be eligible.

RMU, for example, requires that high school students have a GPA of at least 3.0 and continuing students have a GPA of at least 2.75 to be eligible for an ISA, according to Stephanie N. Hendershot, senior director of financial aid at the university.

“We opened it up to all majors; we just said they had to declare a major and at least be at the junior status or an incoming freshman. We didn’t want to limit anyone who was doing strong academically,” Hendershot says. “We wouldn’t turn someone away if they had a higher parent income, because we know situations change.”

Other institutions only offer ISAs to students in certain, often high-earning, majors, such as nursing, or to students with a certain level of financial need. Some also have citizenship and age requirements.

Income Share Agreement Terms May Vary

Some colleges are currently exploring income share agreements as an option for future students; some, like RMU, have only recently embraced the ISA model; and others are a bit more established. Income share agreements may be funded by private capital sources or a college’s own institutional money, while other ISAs are offered by private lenders and available to many students across different colleges.

Purdue became the first four-year college to offer an income share agreement in fall 2016. Since then, nearly 1,000 students have enrolled in Purdue’s ISA program, Back a Boiler, and in total students have received approximately $18 million in funding, Cartwright says.

Today, fewer than 100 colleges offer income share agreements, DeSorrento says, and as schools explore this option for educational funding, they are perfecting the terms of these agreements. The details of the contracts will depend on a school’s unique circumstances and financial resources, he says.

Purdue’s ISA program funding starts at $5,000 for students enrolled in the fall and spring academic sessions and $2,500 for the summer session. The maximum a student can use to pay for the Indiana university depends on his or her cumulative student loans and any prior ISA obligations.

[See: 11 Steps to Minimize Student Loan Debt.]

The terms of repayment also vary.

Many ISAs will result in a student paying back more than he or she was awarded to pay for college. Purdue says on its website, for example, “depending on the student’s post-graduate income, the amount paid back on the ISA may be either lower or higher than the amount provided to the student.”

Others, like the program at Messiah University in Pennsylvania, guarantee students will never repay more than they were awarded, according to David S. Walker, vice president for finance and planning at Messiah.

“The common thread across all ISA programs is assisting families and having access to a way to fund their education. Institutional design parameters will certainly vary, but I hope all institutions would view missional value over financial value,” Walker says.

Under the terms of some programs, repayment halts entirely if a student’s income dips below a certain threshold — at Messiah, for example, repayment is waived when a graduate’s annual salary is less than $25,000 — and in cases of unemployment, students can report their updated income levels such that payments would be zero. The specific requirements related to salary reporting, including during periods of job loss, vary across programs.

To be sure families are getting a good deal, Walker says, “I would strongly encourage students and families to look at and compare the funding sources, line this up side by side with other resources available, then make a decision based on that comparison.”

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

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