Definition of the Income Sharing Agreement (ISA)
What is a revenue sharing agreement (ISA)?
An Income Sharing Agreement (ISA) is a form of college funding where repayments are based on a student’s future income. An ISA provider gives the student money to pay for college education, and the student contracts to pay the provider a percentage of their salary for a set period.
With most ISAs, the revenue sharing rate is between 2% and 10% of the student’s future salary. This means that when their salary increases, the ISA payment also increases. However, the repayment term and the total repayment amount are capped.
Unlike student loans, ISAs don’t earn interest, but many students end up paying more than the original amount they borrowed. Most ISAs do not require a co-signer or good credit, so they are more accessible to some students than other types of funding.
Key points to remember
- An income sharing agreement is a contract whereby a student receives initial money for college in exchange for a fixed percentage of their future income.
- Revenue sharing agreements are not widely available, but some can be done through universities, vocational schools, and private lenders.
- A recent study by the Student Borrower Protection Center found evidence of racial disparities in ISAs offered by Stride Funding, Inc.
How revenue sharing agreements work
The concept of using an ISA to pay for college education was first introduced in an essay by Milton Friedman in 1955. Friedman argued that debt was an inappropriate way to finance education. Instead, he suggested using a method similar to investing in the stock market, where the amount of a lender’s payment is determined by the student’s success – just as a shareholder benefits growth. of a company.
With student debt hitting record levels, ISAs are slowly gaining popularity among students. In 2019, more than $ 250 million of ISA was created, with an additional $ 500 million expected in 2020 ahead of the COVID-19 pandemic. However, unlike student loans, ISAs are not widely available. Most ISAs are offered at four-year colleges or universities, coding bootcamps or other career schools, and private lenders.
The best-known ISA program is Purdue University’s “Back a Boiler” program, which bases its rate of income sharing on the student’s field of study. ISAs for higher-paying university majors, such as chemical engineering, typically have a lower rate and shorter duration than those offered to students of lower-paying majors. Coding academies (vocational schools that teach computer programming) have also started offering ISAs as a form of funding. As these schools are generally not accredited, they are not eligible for federal financial assistance. One example is Lambda School, where graduates are not required to make payments until their salary reaches $ 50,000.
ISAs are also offered by a few private lenders. Stride Financial, an ISA private financier, provides students with up to $ 25,000 in funding per academic year, which is paid directly to their college. Rates are calculated based on the student’s major, the school they attend, and when they expect to earn a paycheck.
ISAs do not bear interest and generally have a fixed term repayment period. However, they are also not subject to consumer protection law.
Advantages and disadvantages of ISAs
ISAs can be attractive to borrowers because they don’t generate interest and have a fixed repayment period. That said, the ISA market is largely unregulated by the federal government and states, which can be risky for borrowers. ISA supporters argue that the deals are neither a loan nor a credit, which means they would not be subject to consumer protection law. However, there is disagreement on this matter; much remains to be determined.
According to the Student Borrower Protection Center (SBPC), ISA issuers may engage in the following practices that may harm student borrowers.
- If a borrower defaults, an ISA provider may resort to harsh collection activities, such as charging high fees and clearing the debt with the borrower’s tax refund.
- In most cases, ISAs are used to provide funding after a student has already exhausted federal student aid, which could lead to excessive debt after graduation.
- The amount of a student’s income share is determined by their field of study, which leaves room for discrimination, as race, gender, and national background may be associated with some college majors.
Racial disparities and ISA
A recent SBPC study found evidence of racial discrimination by Stride Funding, Inc., a private ISA lender. Stride Funding takes into account the borrower’s school and field of study to determine their income sharing rate, two factors closely associated with race.
The data revealed that students who attended historically black colleges and universities (HBCUs) paid more for an ISA Stride Funding product than students at comparable non-HBCU colleges. For example, a computer science student attending Tuskegee, an HBCU, was quoted $ 2,802 more for an ISA of $ 10,000 than a student with the same major attending Auburn. The study found similar disparities among students attending other institutions serving minorities (MSI), such as institutions serving Hispanics (HSI).
Students should carefully consider all of their options when borrowing money to pay for college education. It is important to consider the total amount of the payback and compare it with the amount of a student loan. Whether an ISA is a good option for paying for college education depends on the student and their personal circumstances.