Income Share Agreement FAQ
Hello! I’m James Gallagher, an ISA researcher. I spend most of my time thinking about education financing and how we can improve access to high-quality education. Below is my brief outline of the field for people interested in getting started. If you have any questions, send me an email.
This is a work in progress and will be updated as more information becomes available.
An Income Share Agreement (ISA) is a financial arrangement where an individual agrees to share a percentage of their future income in exchange for receiving something of value upfront (usually an education).
Income Share Agreements, in the context of education, are a debt-free alternative to loans. In a traditional student loan, a borrower must pay back a certain amount of money on a certain date each month, which is not negotiable. ISAs, on the other hand, adjust to the income of the borrower, which means the less they earn, the lower their payments will be and vice versa.
Traditional loans also have balances and interest rates which accumulate over time, unlike ISAs. If a student earns under a certain amount each month, payments will stop and no interest will accrue. If this continues for the rest of the contract, the student will not have to make payments toward their ISA.
Advantages of ISAs in Education
ISAs have gathered a lot of attention in the media based on their ability to act as an alternative to traditional student loans. The main promise of the model is to allow people to attend college or a vocational skills program upfront without having to take out a loan to finance their education. Instead, students agree to share a percentage of their future income with a school for a set period of years.
In the U.S., there are over $1.6 trillion of outstanding student loans, and 11.4 percent of those loans are in a state of default. Each year, two million people receive a bachelor’s degree, and one million people default on their loan.
Despite this, four in 10 recent college graduates are in jobs that do not require a degree. Further, only six in 10 students graduate within six years — the rest are usually saddled with debt that they cannot afford to repay. The U.S. is investing a large amount of money in a system that is ineffective and many people are starting to ask the question “Is going to college worth it any more?”. This has lead to even more interest in alternative financing methods like ISAs which offer more affordable and favorable terms to students. Payments in an ISA are directly linked to the success of a student, so if their educational experience is not worth it, they will not be liable to make payments.
Both bootcamps and colleges are using ISAs as a method of education financing. Around 10 colleges have launched ISA programs, and over 40 coding bootcamps and vocational schools have launched their own ISA programs. In the coding bootcamp space, ISAs are starting to become the norm, whereas in colleges ISAs are still gaining traction.
ISAs protect students from paying for an educational experience that has little impact on their career prospects. Through an ISA, students do not pay anything upfront, and instead pay tuition when they are employed, as a fixed percentage of their income. ISAs also incorporate a minimum income threshold — a point under which students do not have to pay money toward their ISA. This is designed to protect those who become underemployed or unemployed after graduation from paying money toward a school which has provided them with no value. The risk of pursuing further education is taken on by the school — their returns will be commensurate with the success of their students. If a school has great outcomes, they will earn a good return. If a school has bad outcomes, they will notice a direct impact on their bottom line.
Access to Opportunity
ISAs can also increase access to educational opportunities in a variety of ways, especially to those who are not served by the federal student aid system. The Colorado Mountain College ISA Fund allows DACA recipients to finance their education. Because these students are often undocumented, they would not be able to access Title IV funding such as Pell Grants or federal student loans. Vocational bootcamps also use ISAs as an alternative to private loans, which are the primary option of finance available because bootcamps are not typically eligible for federal funding. For instance, a student who attends Lambda School, a coding bootcamp, can agree to share 17 percent of their income for two-years, rather than pay $20,000 upfront or through a loan.
In addition, ISAs open up access to education for those who have exhausted their other options. The University of Utah’s “Invest in U” ISA fund is open to final-year students who don’t have enough money to finish their education and have exhausted their federal aid options. Through this program, students can borrow up to $10,000 in funding, rather than take out a private loan which can come with high interest rates and less favorable terms than federal aid. Students who are unable to access private loans — such as those who do not have a co-signatory or who have a bad credit score — can also benefit from ISAs, which do not require a co-signatory and often do not have any credit requirements.
ISAs align the incentives of schools and their students. When a student takes out a loan to finance their education, the student will be fully liable to pay that money back. If the student fails to succeed after graduation, they will still need to repay their loan. In an ISA, however, schools can be held accountable for students who do not succeed. If a student finds a low-paying job after graduation, the school will bear the risk, not the student.
This incentive alignment also rewards schools which have positive outcomes. If a school has strong outcomes, the payments they will receive from students will be high and will rise as students become more successful. Schools are incentivized to provide a high quality education and to confer knowledge which will help graduates succeed in the labor market. In sum, schools are more likely to help students succeed if they will earn a better return by doing so.
As the ISA space has grown, more people have voiced concerns about the agreements. These concerns range from ethical complaints to questions regarding the long-term viability of ISAs. The main concerns are highlighted below.
ISAs are currently unregulated, which has made some people question whether they are enforceable.
The ISAs offered by institutions such as Purdue University and Lambda School are all legal under U.S. law, and operate under a strict set of best practices adopted from experience offering ISAs. The ISA Student Protection act has been proposed which would implement a series of borrower protections and consumer disclosures to mitigate the prospects of abuse in the space, as can be seen below.
Because ISAs are income-contingent, students may pay back more than they initially borrowed.
However, this is not a flaw of ISAs, rather a feature. This term allows schools to earn a slightly higher return from successful students which will subsidize the losses from students who are less successful. Payment caps in recent programs have been on the lower end of the 1x to 2.5x spectrum — the norm in the space — but still remain an important feature of the agreement.
It is important to note that ISAs are not for everyone. ISAs are best for students who have exhausted all of their federal financial aid options, or for those who will expect their future earnings will be more volatile. For some students, a loan would be a more appropriate method of financing — especially for those who predict they will have a consistent income after graduation.
Some people have claimed that ISAs may result in schools enrolling higher quality students because they are more likely to make payments on-time. This sentiment was echoed in a recent letter by Senator Elizabeth Warren to the Secretary of Education Betsy DeVos, where Warren claimed that ISAs could result in discrimination.
ISAs that are properly structured can do a number of things to mitigate the potential for discrimination. Lambda School, for example, has been very transparent about their admissions requirements and evaluates students based on their motivation and passion rather than their pre-existing skills or other factors such as their age or ethnicity.
That being said, as ISAs become more common, legislation shall have to implement strong protections to ensure that schools cannot discriminate against students when issuing an ISA.
Some observers have claimed that ISAs could result in a new form of indentured servitude. In the past, indentured servants were immigrants who sold their labor and freedom to wealthy people who wanted to move to the British colonies. The wealthy people in these arrangements would own the servant and could trade them as if they were property.
This has been largely discredited as a myth in recent reports about ISAs for a variety of reasons. Firstly, students who enter into an ISA are doing so voluntarily and are made aware of the ramifications of entering into an agreement upfront. Secondly, when a student enters into an ISA, they do not surrender any rights and have complete freedom to make decisions about their own career. For example, if I enrolled in a school and took out an ISA, then decided to drop out and work for a non-profit, I would be able to do so freely.
ISA Student Protection Act
The ISA Student Protection Act, proposed in July 2019, is a bipartisan bill which would create a regulatory framework for ISAs. This bill, proposed by Senators Todd Young (R-Ind.), Marco Rubio (R-Fla.), Mark Warner (D-Va.) and Chris Coons (D-Del.), would help safeguard the ISA space and introduce standard consumer protections and borrower disclosures to protect both students, and innovation in the space.
At present, the ISA space is largely unregulated. Although the enforceability of ISAs is clear, there are no specific protections which will ensure students who enter into an ISA are treated fairly. Most ISA companies have developed their own best practices which mitigate the risk for abuse, but further legislation will be needed to reduce the prospects of abuse as the market grows. The legislation, among other things, would:
Set a minimum income threshold of 200 percent of the Federal Poverty Level ($24,980 in 2019);
Make ISAs dischargeable in bankruptcy;
Prevent issuers from offering agreements that require students to share more than 20 percent of their income for short-term contracts or 7.5 percent for the longest contracts permitted (which can last up to 30 years);
Appoints the Consumer Financial Protection Bureau (the body responsible for regulating the student loan industry) as the oversight authority for ISAs;
Applies federal consumer protection laws to ISAs (e.g. the Equal Credit Opportunity Act and Military Lending Act); and
Creates guidelines around how ISAs will be taxed for both recipients and issuers.
Common ISA Terms
There are a few different components to an Income Share Agreement. These terms have been refined over a period of years, and have been carefully designed to ensure students are protected in the agreements. Here are the main terms you can expect in an ISA:
Income-Share Percentage: The income-share is the percentage of income that a student agrees to share with their school on a monthly basis. This amount typically ranges between 2 percent and 10 percent in college ISA programs, and between 10 percent and 20 percent in vocational schools like coding bootcamps. This is typically because vocational schools like coding bootcamps train people in industries with higher salaries and good placement rates, so the school is more likely to earn a quick return. The higher an income-share percentage, the lower the term for the agreement usually is. The income-share percentage is a share of a student’s income, not their salary — if you are a contractor on the side, that money will also count toward your income.
Term: The term is the number of months you are expected to make payments toward your ISA. Most ISA terms range from one-year for programs with higher income-share percentages to ten-years for programs with lower sharing percentages. As soon as a student makes a payment, the term of an ISA will decrease.
Payment Cap: The payment cap is the maximum amount a student will repay, represented as a multiple of the initial amount borrowed. If a student reaches this limit, their contract will automatically be considered complete. The payment cap typically ranges from between 1x and 2.5x the initial amount borrowed, depending on the aims of the program.
Minimum Income Threshold: The minimum income threshold is a protective term that ensures students will only make payments toward their ISA when they are in a good financial position. Indeed, if a student becomes underemployed or unemployed after graduating from school, they will not have to make contributions toward their ISA until they earn over the minimum income threshold, or their ISA expires. The minimum income threshold typically ranges from between $20,000 and $60,000, depending on the expected outcomes for an ISA program.
Grace Period: The grace period is a term which states students will only make payments after a certain amount of months after graduation. This gives students the time to search for a job without having to worry about making payments, and maximizes the return that a lender can earn on their contract — students are more likely to be employed a few months after than on the day after graduation. This period usually lasts between two and three months.
Refund: Some ISAs include refund clauses which will reduce the term or the income-share percentage in a contract if certain conditions are met. Let’s say you have an ISA where you share 10 percent of your income for two years. If a 50 percent discount is applied, the term may be reduced to one-year, or the income-share may be reduced to 5 percent, depending on the terms of the refund. One situation where a refund may be used is if a student drops out of a program early, which will ensure they pay for the education they have received and nothing else.
Deferment Period: If a student earns below the minimum income threshold, their ISA may enter into a deferment period. When an ISA is in deferment, like in a student loan, students will not make payments toward the contract, and the term of their contract will not be reduced. Instead, each month a student is in deferment their deferment period will reduce by one month. If a student earns under the minimum income threshold past the end of the deferment period, the remaining term will start to reduce. Let’s say you enroll in a vocational program and finance your education through an ISA with a two-year term and a three-year deferment period. If you have an income lower than the minimum threshold, the three-year deferment period will start. If you continue to make under the minimum threshold after the deferment period has expired, the two-year term of the ISA will reduce. Thus, if a student earns under a certain amount for the duration of their deferment period and term, they will make no contributions toward their ISA. Deferment periods are usually between one and three years, depending on the program.
Questions to Research
Although the idea of an Income Share Agreement is not new, there are not many academic research papers on the topic. Most of the few papers published on ISAs can be found in my starter’s guide here. As a result, there are many questions that are still to be answered about the space. Here are some of the main ones:
How can ISAs be applied outside of the context of education?
How many people are aware of the concept of an ISA?
Why have equity-based education finance solutions not been explored as an option until now?
What data should be collected to ensure consistent standards are applied across the industry?
What are the best sectors for new companies to explore?
What outcomes data should institutions share, and how should that data be audited?
How can we best educate the public about ISAs to ensure they fully understand the impact of these agreements?
Due to the nascent stage of the industry, there is a limited amount of data available regarding ISAs. Below I have collected some data around the terms offered by ISA programs, as well as a list of companies currently operating in the space. As more data becomes available, I shall update this section.