Income share agreements: Everything you need to know

If you’re looking for alternatives to student loans, you may consider income share agreements as an option for financing your education. These agreements allow you to borrow money and repay your lender at a fixed rate of your income when you graduate.

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) is an agreement between the lender and the borrower that allows the borrower to repay the amount lent as 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 private or federal student loans. The share agreements do not charge interest like traditional student loans do.

Students with lower salaries may end up not paying back everything they received since repayment is based on a percentage of future income. Students who earn higher salaries when they graduate could pay more than they received. However, ISAs typically come with a “payment cap” that limits the maximum amount borrowers must pay.

Income thresholds

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 if you’re able to pay the maximum repayment cap for your plan upfront.

Where to get an ISA

Some colleges and degree programs offer ISAs to recruit new students. Certain employers also offer income share agreements to employees who invest time in learning new skills or pursuing 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, 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 in the long run when compared to federal or private student loans — even with great rates.

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 might receive high rates on bad credit private 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.

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 student 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.

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. Calculate the amount you need to borrow and compare this number with your potential earnings after college to determine if an ISA is right for you.