ISAs help people gain vital education affordably
Before diving into the specifics of income share agreements (ISAs), it is important to gain a broad understanding of what an ISA is.
What is an ISA?
Put simply, an ISA is a contractual agreement in which you receive funding for your education. In exchange, you agree to share a fixed percentage of your post–graduation income over a defined period of time.
An ISA is completely different from a loan because your payments are in-line with your income. The more you make, the more you pay. The purpose of an ISA is to ensure that students can always afford their education as well as properly align student and school objectives. Under a loan, a school does not care whether the student makes money as long as the student’s tuition has been paid. Any school offering an ISA shows students that they believe their education will be a positive investment in the student's future.
Because ISAs are relatively new, many people do not fully understand the terms of the agreement. Here are five of the key terms featured in ISAs:
1. Income Share:
The income share is the percentage of monthly pre-tax income a student agrees to pay.
2. Payment Term:
The payment term is the maximum number of monthly payments required to fulfill the ISA. Once you have made payments equal to the payment term, the contract is complete.
3. Minimum Income Threshold:
Your payments pause when your monthly income is below the minimum income threshold. If you are a dollar below the minimum income threshold, you pay nothing that month in the ISA. When your income falls below the minimum income threshold, your contract goes into deferment.
4. Deferment period:
The deferment period is the period of time your contract can be in deferment until it counts against the payment term. For example, if you have a 24 month payment term contract with a deferment period of 60 months and have not been above the minimum income threshold for that time, the 61st month you do not meet the threshold will result in your payment term going from 24 to 23 months.
5. Payment Window:
The payment window is the maximum length of time over which you could make payments. If your ISA is in good standing, the obligation ends when the payment window is over even if you’ve paid less than the initial funding amount or have not completed the payment term. The total payment window is the payment term + the deferment period.
6. Payment Cap:
The payment cap is maximum amount a student can pay. If your monthly payments total the payment cap, the ISA is complete regardless of the amount of months you have paid.
How do you finish an ISA?
There are two ways that you can complete your ISA:
1. You complete the required number of payments (i.e. finish the payment term). This is the simplest and most common way an ISA is concluded.
2. You achieve the payment cap. If you land a very well-paying job after your graduation, your ISA will hit the payment cap. Once you hit the cap, you do not have to worry about your payment term.
How Do ISAs Help Schools and Students?
ISAs help schools in many ways. Schools offering ISAs increase accessibility because students that either do not qualify for loans or prefer not to take them may be able to affordably attend the institution. This in turn leads to greater enrollment and ensures that there are fewer empty seats in the classroom. Additionally, a school that provides an ISA sends a strong signal to incoming students: the school is so confident in the benefits of the education it provides that it will take a portion of the student's income instead of a loan to cover the cost.
The most important benefit ISAs provide for students is that the contracts reduce risk. If a student takes loans and graduates into a difficult economy (such as the US economy under COVID-19), they may still be responsible for not only the principle loan but also interest and late fees. Under an ISA, a student making below the minimum income threshold pays nothing. Another important benefit of ISAs is that they allow students to defer their tuition. Students using ISAs pay their tuition after they graduate, find a job, and earn above the income threshold. This is much more student-friendly than having students pay tuition up front and then hopefully recuperate their costs after their graduation.
Here is an example ISA:
Alex agrees to an ISA from a school to cover his tuition, using the terms below.
Alex’s ISA allowed him to get an education that increased his value in the job market and take in a salary that he would not have been able to otherwise. Even after his ISA has expired, Alex continues to reap the benefits of his higher salary.