Alternative to a Student Loan? Income Share Agreement (ISA)

28 Sep

I happened to read an Income Share Agreement (ISA) article in Wall Street Journal published in Sept. 11, 2017. I never heard of an ISA until I read the article. I was curious. “What is an ISA?” “Is an ISA actually a student loan disguised in a fancy phrase?” The article said it was not a student loan but I was skeptical. I researched an ISA in Business Insider, Forbes, American Institute for Research, etc.
In summary, under an ISA, the pre-determined percentage of income will be taken away for fixed time, usually less than 10 years, after you land on the job. The percentage and length of payment depends on your major. If you are studying to receive a marketable degree like engineering or business, you are more likely to have lower percentage and shorter terms. If you end up with low paying job or no job, you might not have to pay anything at all.
There are different terms and conditions for an ISA. You need to read and understand the fine print before signing an ISA. Here is an example of an ISA offered by Purdue University in Indiana. Purdue University has started the ISA last year. Some of their terms are as follows.

  • There is a cap of how much a student can borrow and pay.
  • If you make less than $20,000 per year after graduation, then you won’t pay any.
  • High income earners might end up paying more to an ISA in total amount than a student loan.
  • The annual percentage and length of payment defers depending on major and year of graduation.

For example, English major expecting to graduate in June 2020; she will be paying 4.88% of her income for 116 months. Computer Engineering major graduating in June 2020, 4.72% of her income will be taken away for 88 months.
Purdue U website compares an ISA to a student loan and scholarship.

      Loan ISA Scholarship
No academic or grade requirement
No full repayment requirement
No long-term obligation with principal balance
No interest accrued
Payment terms Variable, usually 10-20 years 10 years or less N/A

Scholarship is free money because you earned through academic, athletic or some kind of achievement. A student loan and an ISA are both debt. You owe money and need to pay back. An ISA might be less risky for students end up in low paying jobs.

How about an ISA from private lenders? Here are some examples.

  • MPowers Financing requires students to pay fixed rate of 7.99% to 13.99% for 3 to 10 years.
  • Upstart charges you fixed rate of 4.3% to 25.07% for 3 to 5 years.

25.07% for 3 to 5 years! This sounds like a loan shark to me. If your income is $50,000 per year, $12,535 or $1,044 per month will be subtracted from your pay.

Conclusion:
This is no brainer for me. No to an ISA! No debt for me, ever! I hate borrowing money in any terms or conditions. Borrowing means I have less freedom. I have to pay money back. I rather have a pain of working and saving now than piling up debt and struggle later. The question is pain now and free in the future vs carefree now and problems later. You need to make a decision yourself. Imagine what you can do if you don’t have a debt. An ISA is borrowing money in exchange of giving up a portion of your future income. Interest is incorporated into the pre-determined percentage. Don’t be fooled by an ISA saying it is not a student loan. It is a DEBT. An ISA gives you different terms and conditions compared to a student loan, but it is still a debt.
I want to encourage students and parents to save money and go to college. For students, find scholarships and apply them as many as you can. Financing college is done by planning well, studying hard, and working and saving money. You have to pay anyway. You will feel better to take care of finance before you fall into a pit of debt. Be proactive rather than reactive!
Did you know an ISA? What do you think of an ISA? I love to hear from you. Please leave your comment.

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