How Income Share Agreements Work
A Flexible Alternative To Student Loans
ISAs are innovative contracts that provide students with funding for education in exchange for a percentage of their future income over a set period of time.
The US ISA market has grown over 200% in each of the last 5 years. In 2020, originations are expected to approach $500M.
Typical Key ISA Terms
Income Share Percent
The percent of future income that a graduate pays over the ISA’s term. Payments rise and fall with income to help ensure that payment obligations remain affordable.
Minimum Income Threshold
If a graduate’s income does not meet a certain minimum threshold, usually between $40-50k, then payment obligations are paused until income rises above the threshold.
Term & Cap
The ISA obligations end after a certain number of payments are made over a certain term, often ranging from 2-10 years. Such obligations also end if payments equal a certain payment cap.
Comparing ISAs to Student Loans
Student Loans Are Fundamentally Flawed
Nobel Prize winning economist, Milton Friedman, observed that loans are an inappropriate instrument for financing education, because they offer high risk without collateral. He argues that an equity based approach, rather than debt, could be a better approach to financing education. Sheila Bair, 19th Chair of the US FDIC, agrees. Furthermore, Ms. Bair advocates for rethinking the entire US student loan system and transitioning to an equity based approach using ISAs.
An Equity Based Approach
ISAs offer an attractive option that matches the needs of the education finance market.
Students with ISAs get funding for their education in exchange for a flexible payment obligation that rises and falls with earnings after graduation. Reports from existing ISA programs indicate that students feel positively about their experiences with ISAs.
The chart below shows what the picture looks like for ISA investors. A Federal Reserve Bank of Philadelphia discussion paper highlights that existing ISA programs report better than expected payment patterns.
Source: Manhattan Institute, March 2019 Report
In recent years, ISAs have gained popularity as a means to finance education.
Major universities such as Purdue have created ISA programs for their students, while new educational models, such as short-term coding academies, look to ISAs as a financing tool. The idea has proved popular with students and parents, too.
– Sheila Bair, 19th Chair of the US FDIC