With over 44 million Americans owing over $1.5 trillion in student loan debt, it is no wonder that higher education is taking center stage in politics.1
In an era when the average student graduates with $30,000 in student loan debt, many are looking for alternatives to taking out big student loans.
One such alternative is Income Share Agreements (ISA), but with one in 10 students not even realizing they need to pay back their student loans, and a majority who don’t understand how student loan interest works2, the idea of adding another repayment product to the mix is daunting.
In fact, without financial wellness education, the ISA could easily turn into another crisis.
What Are Income Share Agreements?
ISAs are being touted as an alternative to student loan debt. The ISA is a contract between the student and the school.
This contract states that students will pay a specified percentage of their earnings after graduation for a fixed period of time.
In this way, a student will not owe money to pay for college while attending college but will owe money once they graduate and find employment.
For students who do not qualify for federal financial aid, whose college costs are higher than a federal grant or loan, or who want to take a less traditional educational path, the ISA is a possible alternative.
ISAs:
- Charge a percentage of gross income
- Last up to 30 years
- Don’t charge interest
- Have variable payments based on income
- Have payments that are not tax-deductible like student loan interest
Although an ISA does not charge interest, a student will still pay more than what they borrowed.
For example, a college student who takes out $10,000 at 4 percent of income for 9 years and makes $35,000 per year each year will end up paying $12,600 back to the school. If the student’s wages increase, so does their repayment amount.
Until recently, ISAs were completely unregulated. However, with a new bipartisan bill in the works, some of the criticisms of the ISA have been addressed.
The ISA Student Protection Act
Because of concerns about the ISA, such as the percentage rate a college can charge or the number of years a student will be required to repay, the newly introduced Student Protection Act addresses issues in order to protect students.
If the bill passes:3
- The ISA funder will have to show students what their monthly payments would be and compare that to taking out a federal loan of the same amount.
- If the student makes less than 200 percent of the federal poverty level, they will not be required to make payments toward their ISA.
- Unlike a federal student loan, an ISA can be discharged in a bankruptcy.
- The percentage rate for repayment cannot be higher than 20 percent of a student’s gross income.
- Determined what can be considered income.
- The maximum term can be no more than 360 months, but this can be extended by the number of months in which the payment was zero.
- The ISA is not considered credit and the ISA funder is not a creditor.
Although this is a good start, the bill does not address the education needed by students to understand the ISA and make appropriate decisions about whether it is a good idea for them.
Things to Consider
For educational institutions considering ISAs, it will be essential to help students understand the contract and how it will affect them after graduation.
Such financial wellness education should include the following:
ISA Percentage
The lower the percentage for the ISA, the better off the student will be. Be sure they understand how much they will repay, as well as how taking that percentage out of their income can affect their budget.
Term length
Since each ISA can have different term lengths, be sure students understand the amount of time they will be making the payments. Also, help them understand what happens during times of hardship.
Potential Income
Since the repayment amount is based on salary, students should understand what their repayment will be based on their chosen career.
Show them how to use the Bureau of Labor Statistics to estimate their salary over the ISA period. Then help them calculate the amount they will pay monthly, yearly, and over the course of the ISA.
The Student’s Major
Students need to understand that softer majors, like theatre or women’s studies, will have significantly different terms than a field that will get a higher income.
Be sure to help students understand how their major will affect their ISA.
ISA Funder
If the student is considering a private ISA, explain the necessity to check the track record of the funder.
Help them understand predatory lending practices and how to avoid them.
Location/Cost of Living
Where a student plans to live after graduation will affect their ISA repayment.
Help them determine if they can afford the cost of living in a particular area while repaying the ISA. Help them research other potential areas in which the cost of living and wages could make the ISA possible.
Other Debt
Be sure that students consider all student loan debt, in addition to the ISA when making calculations.
Students with both ISA and loans will be repaying both at the same time.
Reading the Contract
Help students understand the fine print in the contract.
For instance, what will count as income for the repayment?
Some include both the student and their spouse. Some might include inheritance or child support.
Compare to Alternatives
Help students determine how their particular ISA agreement compares to other possible alternatives such as federal student loans, private student loans, and Parent PLUS loans.
The lack of financial wellness education among students is one of the causes of the current student debt crisis.
Without appropriate education on ISAs, they could easily be the next crisis.
By offering financial wellness education to your students, you can help them make the right decisions for their individual circumstances.
To see how the iGrad Financial Wellness Platform helps colleges prepare their students, check out our demo video here.
1 - https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-student-loans-and-other-education-debt.htm
2 - https://studentloanhero.com/featured/survey-majority-student-loan-borrowers-know-interest-forgiveness-works/
3 - https://www.congress.gov/bill/116th-congress/senate-bill/2114
