If you are reading this, you are probably considering all your options for financing your college education. Income Sharing Agreements are a new tool employed by colleges and universities to help students pay for school. Though this way may be beneficial to some students, it is not the best choice for everyone. Read on to learn more about Income Sharing Agreements and whether or not they are right for you.
What are they?
Income Sharing Agreements (ISA) allow students to borrow money from colleges and universities. After graduating, students pay back the college with a percentage of their income over a period of time. The percentage you owe is dependent upon the amount of money you earn. Lower salaries owe bigger percentages over longer periods of time, and higher salaries owe lower percentages over shorter amounts of time.
Though the lingo of ISA’s may sound more appealing than student loans, keep in mind that ISAs are very similar. Though they don’t technically claim “interest,” you may end up paying more than you initially borrowed depending on your repayment terms. For example, if a student agrees to an Income Sharing Agreement of 5% for 10 years to pay off $10,000, this percentage remains the same even if they receive a raise in salary. And even if you pay off the money you borrowed early, you will still be required to fulfill the period of time you agreed to. This extra money could be compared to the accrued interest of student loans. Most ISAs halt payback if it reaches 2.5x the loan amount. (But still! That’s a hefty chunk of change). For someone that initially borrowed $10,000, that could mean paying back $25,000.
Benefits of Income Sharing Agreements
You only pay when you are employed after graduation. If you don’t have a job, your ISA will suspend until you find a new place to work. Also, most ISA’s have a minimum income requirement, so you won’t have to make payments if you’re earning minimum wage.
Should You Consider an ISA?
ISA payback rates are determined by the college and the college major. Those in higher paying fields would likely have better repayment terms than those that earn less. This means that students in STEM (Science, Technology, Engineering, and Math) would be better candidates for Income Sharing Agreements.
Income Sharing Agreements can be an ideal alternative to student loans under the right circumstances. Before jumping into anything, be sure to compare the money you would have to pay back with student loans vs. an ISA. Keep in mind, Income Sharing Agreements are not regulated in the same way as traditional federal loans. Traditional federal loans have benefits such as deferment (a way to delay the payment of your loans due to certain life hardships) and forbearance (a way to pause student loan payments when you cannot afford them).
Understanding all of your financial options is an important part of the college search process. Whether or not you decide an Income Sharing Agreement is right for you, give yourself a pat on the back for doing your research. To learn more about student loans for comparison, read this article.