Income share agreements: Everything you need to know

Like other college funding methods, income share agreements have advantages and disadvantages. It’s best to consider all options when determining the right solution for you to pay for college.

What is an income share agreement?

An income share agreement (ISA) allows students to receive funding for higher education while they’re in school and pay it off using a fixed percentage of their income after graduation. The repayment term and income percentage are determined when the income share agreement is signed.

Income share agreements are not the same as typical student loans. First, income share agreements do not charge interest. Moreover, because repayment is based on a percentage of future income, students with lower salaries may end up not paying back everything they received. Students who earn considerably more upon graduation could pay more than they received. However, ISAs typically come with a “payment cap” that limits the maximum amount borrowers must pay.

Income share agreements often have a minimum income threshold borrowers need to meet, also called a salary floor. This amount is typically $30,000 to $40,000 annually. If borrowers earn less than the threshold in any given year, their requirement to make payments through the ISA can be waived that year and their term will be extended. You can typically exit your ISA anytime, provided you’re willing to pay the maximum repayment cap for your plan upfront.

Some colleges and degree programs offer ISAs to recruit new students. Some employers also offer income share agreements to employees who invest the time to learn new skills or pursue advanced higher education while working full time.

What should you know before signing an income share agreement?

Income share agreement terms vary by program, so you’ll want to understand the ins and outs of any income share agreement you’re considering well before you sign on the dotted line.

Details you’ll want to know and understand include:

• Repayment timeline: The number of payments required after you graduate and the maximum repayment period.
• Income percentage: The portion of your income that will go toward your ISA repayment.
• Minimum income threshold: The minimum income you need to earn in order for payments to count toward your repayment.
• Maximum payment cap: The maximum amount you’ll be required to pay toward your ISA.

Income share agreement example

Let’s say you sign an income share agreement for $10,000 with the following terms:

• Maximum number of monthly payments: 88.
• Income share percentage: 3.88 percent.
• Minimum income threshold: $1,667 per month or $20,000 per year.
• Payment cap: $23,100.

In other words, you’ll pay 3.88 percent of your income for each month that you earn at least $1,667, and you’ll continue until you make 88 of these monthly payments or pay a total of $23,100, whichever comes first.

If you make the minimum income required ($20,000 per year or $1,667 per month), your monthly payment toward the ISA would be around $65. After 88 payments, that would equal roughly $5,700 — a little more than half of what you originally received.

On the other hand, if your salary is $56,000 per year or $4,667 per month, your monthly payment toward the ISA would be $181. Across 88 payments, you’d pay $15,934. That’s roughly $6,000 more than what you originally borrowed.

When is an income share agreement a good idea?

An income share agreement could become incredibly costly if you enter a high-earning field, with some programs setting payment caps at more than twice what you originally received. Because of this, an ISA could cost more over the long run when compared to federal or private student loans.

With that in mind, an ISA works best if:

• You’re planning to earn a degree in a field that doesn’t have steep salary growth potential.
• You’ve maxed out federal loan options but cannot qualify for private student loans.
• You have a poor credit score and would receive high rates on student loans.
• Your school offers an ISA with reasonable terms and a low payment cap.

ISAs are a good option if they save you money over the long haul or provide funding in situations where you have no other option. Because income share agreements do not use your credit score when considering your application, they’re an attractive option for borrowers with poor credit who have already taken out the maximum amount in federal student loans.

When is an income share agreement a bad idea?

If you are going to school to enter a field with high earning potential, you may end up paying back more than you received if your ISA doesn’t include a cap. If you qualify, federal loans are typically a better option for most borrowers, especially if you need to cover a large portion of the cost of your education.

If you need to cover smaller funding gaps or have already exhausted the aid available, then an ISA is a viable option. Just make sure you shop around because if you have good credit, you may be able to get better terms with a private loan from some lenders.

The bottom line

Income share agreements are one option for student loan repayment that can lessen the burden for borrowers by capping their costs based on income. These arrangements work great for some borrowers but can also result in excess payments if a cap is not in place. Consider the amount you need to borrow and your potential earnings after college to determine if an ISA is right for you.