Income Sharing Agreements: What You Need to KnowBy Julio Cachila, UniversityHerald Reporter
Income Share Agreements, or ISAs, are relatively new ways of acquiring funding for college education. While traditional student loans require a monthly repayment regardless of a graduate's income status, ISAs offer a more flexible way of paying back: by giving a share of one's income every month for a specific period of time.
ISAs have been used for more than a decade in Latin America, but it is still gaining ground in the U.S. TIME reports that the idea of borrowing funds for college education in exchange for a share of a student's income after graduation has been here for decades, albeit being called different names.
For example, Milton Friedman, a libertarian economist, proposed in 1955 that students be allowed to sell "human capital investments." Several states also pushed for "Pay It Forward" proposals that would require student borrowers to pay a percentage of their income after graduation.
Kevin J. James, a research fellow with the American Enterprise Institute's Center on Higher Education Reform, and Alexander Holt, a policy analyst in the New America Education Policy Program, have studied ISAs and offer some insight regarding the upsides and downsides of the college-funding option.
Here are some upsides, according to their research:
Lowered risk for students
ISA recipients pay a percentage of their income after graduation, but if a student is unable to earn a certain amount, they are not required to pay any amount.
"ISAs have no explicit amount the student must ultimately pay-and thus charge no interest-students will never find themselves with a spiraling loan balance they may never be able to repay," they wrote.
Lowered college funding costs
Although Holt and James both note that federal student loans are still the best financial aid available for students, ISAs can help pay for a student's tuition better than high-risk private loans.
It makes college more affordable for low- to moderate-income students
ISAs simply enable students from low- and moderate-income families afford college education without the fear of accruing student debt.
Here are some downsides:
ISA recipients might pay more than the amount they would pay federal loans
Based on their calculations, research authors have found that while federal loans keep charging even if a student borrower has no income, the amount repaid by ISA recipients might be higher than when they availed of federal aid. This is because with ISAs, the higher the income a student receives, the higher the amount he/she pays back.
Colleges Need Funding
Colleges need funding to pay academic and non-academic staff, as well as utility expenses. Since students who avail of ISAs only pay after graduation (with some of them taking more time than others due to income variations), colleges need to face the challenges of paying upfront costs.