What are Income Share Agreements (ISAs)?

An income share agreement is a student loan with repayment terms requiring a percentage of a graduate’s monthly income after their salary reaches a certain threshold.

Basically, you borrow money with the expectation that once you reach a certain income level, you will owe a percentage of your monthly paycheck to the lender for an agreed-upon period of time.

ISAs were marketed as alternatives to student loans for a long time, but the Consumer Financial Protection Bureau (CFPB) determined that ISAs are, in fact, student loans. Unfortunately, they are also much less regulated and can result in repaying much more than what was owed.

They can also be difficult to understand. Though they are considered student loans, their contracts have very different terms and qualifications.

To many people, an ISA can make it seem like a school or other educational program is investing in your success. Why would a school offer you money and only make you pay it back after you’re making a sizeable salary if they didn’t have confidence in their program?

But don’t get sold on this attitude. They may seem confident, but an ISA is still a loan. Carefully compare ISA terms to other options before committing.

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How does an ISA work?

Income share agreements are loans that require repayment based on your salary. The way they work varies greatly from lender to lender, but here are the basic terms you need to know to understand ISAs.

Salary floor

An ISA’s salary floor is the minimum salary you must earn before the lender starts requiring monthly payments. Months in which you make less than the salary floor can either count toward your repayment period or add to your repayment period depending on the lender’s terms.

Payment cap

The payment cap sets a limit on the total amount you repay. For example, if you borrow $5,000 and your payment cap is 1.8x, you will repay a maximum of $9,000.

Income share percentage

The income share percentage is the percentage of your monthly income you will be required to pay after you meet the salary floor requirements. Most ISAs charge between 2 and 10 percent.

Repayment term

An ISA repayment term describes how long you agree to make monthly payments after you graduate. This is usually between two and ten years.

Income share agreement red flags

Because ISAs lack the strict regulations of public student loans, it’s essential to know how to spot a bad deal. Here are some major ISA red flags to look out for.

High payment caps

If the payment cap on an ISA is higher than 2x, that means you could end up paying more than twice what you borrowed. Avoid this deal at all costs.

Low salary floor

If an ISA lender won’t require payments until you’re making $50,000 per year, that’s much more reasonable than a salary floor of $15,000. Research median salaries for your target career and ensure the salary floor is representative of that number rather than an arbitrarily low amount.

High income share percentage

If the income share percentage of an ISA is any higher than 10 percent, stay away. That’s higher than average and you will likely pay much more than you bargained for.

Long repayment term

Like a high repayment cap, a long repayment term can also mean you will pay back much more than you initially borrowed. Avoid ISAs with terms longer than ten years.

Income Share Agreements vs. Student Loans

No matter what a lender advertises it as, an income share agreement is a student loan. However, there are key differences between ISAs and federal student loans that will help determine which is best for your situation.

Eligibility

Some ISA programs require students to have a certain major or meet a GPA requirement to borrow money. Federal student loans do not have any merit-based requirements and are based solely on financial need.

Principal

Student loans have a principal amount the lender charges interest against. Income share agreements allow you to borrow a specific amount, but there is no interest charged—your payments are calculated based on your salary only.

Rates

The standard repayment plan for federal Direct Loans has a consistent monthly payment and applies interest to the principal. ISA payments are calculated as a percentage of your income, as long as your income is above the salary floor. There is no real principal or interest rate.

If you have a high income or you’re entering a career path where salaries grow quickly, you could end up paying more than you would with a regular student loan.

Repayment total

When you’re finished repaying your principal and interest on federal Direct Loans, your payments cease, even if this occurs before the end of your chosen repayment plan.

With an ISA, you promise to make payments for a certain number of years even if the total amount you pay exceeds what you owe. Payments will only stop if the repayment term ends or you hit the payment cap.

Forgiveness

If you have public loans, you may be eligible for loan forgiveness programs. An income share agreement cannot be forgiven and they are not included in any federal loan forgiveness efforts.

Is an ISA a good idea?

An ISA could be a good idea if:

• You need a small amount to fill the gaps between student loans.
• You’ve exhausted all public loan options.
• You can’t find a private loan with a better rate.

Always explore other options first, including federal student loans, private student loans, and grants.

There are very few situations in which an ISA would actually be a good idea. They can land you with more debt with fewer ways to get out of it.

How can I get out of an ISA contract?

You technically can’t, and that’s one of the big drawbacks of an income share agreement. There are currently no rules around how an ISA would be treated in a bankruptcy proceeding, and there are no forbearance programs for ISAs.

Since they aren’t treated like regular loans, you can’t use debt settlement or consolidation. You’re stuck making payments until the repayment term ends.

Technically, if you make less than the salary floor for the duration of your repayment term, you might be able to get off paying less than what you originally borrowed. But this is extremely rare.

In the end, it’s best to stick with standard student loans. They’re more regulated, making them a safer financial choice.

Better Future Forward: An example of an ISA predator

In early September of 2021, the CFPB cracked down on an ISA lender that had been falsely representing its loans as, well, not loans at all. Better Future Forward, Inc., not only represented their income share agreements as not being loans, but also left out important disclosures that federal laws require.

After the CFPB ruling, Better Future Forward must:

• Provide the applicable disclosures required by the law.
• Stop charging prepayment penalties.
• Cease misleading their borrowers.

While these changes are definitely improvements, this should serve as a warning to those considering income share agreements.

This is only one lender that has been caught by the CFPB. There could be many more, and it may be difficult to tell which lender is telling the truth and which one is withholding important information.

If you take one thing away from this article, let it be this: Income Share Agreements are loans. They will create student debt, and they aren’t necessarily a better alternative to federal Direct Loans.