Income share agreements: Everything you need to know
The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
Income share agreements are a type of college funding that you repay over a set number of years using a fixed percentage of your income. They can serve as an out-of-the-box solution when it comes to paying for college without student loans.
Like other college funding methods, however, income share agreements have their own share of advantages and disadvantages. Read on to learn how income share agreements work and when they make the most sense.
What is an income share agreement?
An income share agreement (ISA) is a type of agreement that allows students to receive funding for higher education while they’re in school and pay it off using a fixed percentage of their income after they graduate. The repayment term and income percentage are determined when the income share agreement is signed.
While income share agreements sound similar to loans on the surface, there are some key differences, including the fact that income share agreements do not charge interest. What’s more, the fact that repayment is based on a percentage of future income means that students with lower salaries may end up not paying back everything that they received. Students who wind up earning considerably more upon graduation could end up paying more than they received, although ISAs typically come with a “payment cap” that limits the maximum amount borrowers are required to pay in.
Income share agreements often have a minimum income threshold borrowers need to meet, also called a salary floor. This amount is typically $30,000 to $40,000 annually. If borrowers earn less than the threshold in any given year, their requirement to make payments through the ISA can be waived that year and their term will be extended. You can typically exit your ISA at any time, provided you’re willing to pay the maximum repayment cap for your plan upfront.
Some colleges and degree programs offer ISAs as a way to recruit new students, and there are also employers that offer income share agreements to employees who invest the time to learn new skills or pursue advanced higher education while working full time.
What to know before signing an income share agreement
Income share agreement terms vary by program, so you’ll want to understand the ins and outs of any income share agreement you’re considering well before you sign on the dotted line.
Details you’ll want to know and understand include:
- Repayment timeline: The number of payments required after you graduate and the maximum repayment period.
- Income percentage: The portion of your income that will go toward your ISA repayment.
- Minimum income threshold: The minimum income you need to earn in order for payments to count toward your repayment.
- Maximum payment cap: The maximum amount you’ll be required to pay toward your ISA.
Income share agreement example
Let’s say you sign an income share agreement for $10,000 with the following terms:
- Maximum number of monthly payments: 88.
- Income share percentage: 3.88 percent.
- Minimum income threshold: $1,667 per month or $20,000 per year.
- Payment cap: $23,100.
In other words, you’ll pay 3.88 percent of your income for each month that you earn at least $1,667, and you’ll continue until you make 88 of these monthly payments or pay a total of $23,100, whichever comes first.
If you make the minimum income required ($20,000 per year or $1,667 per month), your monthly payment toward the ISA would be around $65. After 88 payments, that would equal roughly $5,700 — a little more than half of what you originally received.
On the other hand, if your salary is $56,000 per year or $4,667 per month, your monthly payment toward the ISA would be $181. Across 88 payments, you’d pay $15,934. That’s roughly $6,000 more than what you originally borrowed.
When is an income share agreement a good idea?
An income share agreement could become incredibly costly if you enter a high-earning field, with some programs setting payment caps at more than twice what you originally received. Because of this, an ISA could cost more over the long run when compared to federal or private student loans.
With that in mind, an ISA works best if:
- You’re planning to earn a degree in a field that doesn’t have steep salary growth potential.
- You’ve maxed out federal loan options but are unable to qualify for private student loans.
- You have a poor credit score and would receive high rates on student loans.
- Your school offers an ISA with reasonable terms and a low payment cap.
At the end of the day, ISAs are a good option if they save you money over the long haul or provide funding in situations where you have no other option. Because income share agreements do not use your credit score when considering your application, they’re an attractive option for borrowers with poor credit who have already taken out the maximum amount in federal student loans.
If those situations don’t apply to you, you’re likely better off using federal student loans to pay for higher education, or even private student loans if you have good credit. Before signing up, compare your options side by side and run the numbers to see which is the better deal.