Income Share Agreements vs. Student Loans: What’s the Difference?

As the cost of education continues to rise, many people wonder if there are alternatives to student loans. While federal and private student loans are typical financing options, some schools and programs offer income share agreements (ISAs). 

An ISA is a unique funding option, as payments are a percentage of your income and can change over time. While ISAs can sound appealing, there are important things to consider when comparing income share agreements with student loans. 

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What is an income share agreement?

An income share agreement (ISA) is a type of financing that allows you to receive funding for school that you pay back after you graduate with a percentage of your income, either for a set period or until you pay a specific amount. They’re often presented as alternatives to student loans. Despite that, in 2021, an action by the Consumer Financial Protection Bureau (CFPB) found that ISAs should be treated as loans. 

“While ISAs have no formal rules, they usually share common terms or characteristics,” says Glenn Sanger-Hodgson, a certified student loan professional and founder of Shonan Gold Financial LLC. “First and foremost is the ISA funding amount, or how much the money will be paid towards the student's education.” 

“Other terms relate to future payments, including the monthly payment, which is usually set somewhere between 2-10% of the student's gross earned income after graduation, the payment term, or how long the student must make payments, and a payment cap, which usually is a maximum amount the student is required to pay,” Sanger-Hodgson adds.

How income share agreements differ from student loans

Both income share agreements and student loans are vehicles to pay for higher education. But when comparing an ISA vs. a student loan, there are some notable differences:

• Eligibility: Income share agreements have eligibility requirements that are different from student loans. Typically, ISA eligibility depends on your school and field of study. 
• No interest: Unlike student loans, income share agreements don’t accrue interest or have a set interest rate. 
• Monthly payments: Income share agreements base payments on a percentage of your income. That means they can increase or decrease over time. Depending on your level of income, you could pay much more or less than the initial funding amount. With fixed-rate private student loans and federal student loans that aren’t under an income-driven repayment plan, monthly payments will always be the same.
• Minimum income threshold: Payments under an income share agreement only start if your income is above the minimum income threshold. If it’s below, you may not need to make payments. For example, Illinois recently set the minimum income threshold for ISAs at $47,000. There is no such threshold for student loan payments.
• No cosigner or credit requirements: Income share agreements don’t require you to have good credit or have a cosigner. Federal student loans typically don’t have such requirements either, but private student loans do. 
• No forgiveness or refinancing options: Since income share agreements are a non-traditional form of financing and an alternative to student loans, they’re not eligible for student loan forgiveness or refinancing. 

Who offers ISAs and how they work

Income share agreements aren’t widely available like federal and private student loans. 

“They’re more common abroad, but are also popular at non-accredited programs, such as small private colleges and vocational programs like coding bootcamps,” says Becca Craig, a certified student loan professional and certified financial planner (CFP) at Focus Partners Wealth.

While some schools, private lenders, and training programs offer income share agreements, eligibility can vary and may depend on your degree. Income share agreements work a bit differently from student loans. These are the main features of ISAs:

• Funding amount: This is the amount provided upfront to cover your educational costs. 
• Income percentage: Your ISA will have a specific income percentage used to repay the funding amount. While the percentage can vary with each agreement, generally it’s between 2% and 10%. 
• Payment cap: Each ISA will have a payment cap, which is the maximum amount you’ll repay. This could be 1 to 2.5 times the original amount of funding. 
• Repayment term: The amount of time you have to repay the income share agreement can vary, but it is typically between 2 and 10 years. 
• Salary threshold: You’ll typically only need to make payments once your income is more than the minimum threshold. If it’s less, you probably won’t need to make payments. Be aware that this could extend the repayment term, though.

Income share agreement example 

Let’s say you received $40,000 under an income share agreement. The income percentage is 5% and you have 10 years to repay it. If you earn $60,000 for the next 10 years, you’ll pay a total of $30,000. 

If you earn $50,000 for the next 10 years, you’ll pay $25,000. If you secure a six-figure job and earn $100,000 for the next 10 years, you’ll pay $50,000. As a simple example, you can see that it’s possible to end up paying less or more than the funding amount you received.

Pros and cons of ISAs vs. student loans

When comparing income share agreements and student loans, it’s crucial to evaluate the benefits and drawbacks of each financing option. Here are the pros and cons of ISAs vs. student loans: 

“An income-share agreement may lead to lower payments than student loans when the borrower has low income, but higher payments when the borrower has higher income or borrowed less,” says Mark Kantrowitz, a financial aid expert and author of “How to Appeal for More College Financial Aid.”

“A borrower of an ISA pays a fixed percentage of income instead of a fixed dollar amount each month,” adds Kantrowitz. “The ratio of total payments to total funding for an ISA is often greater than that required for a loan with level amortization for the same repayment period.” 

Should you consider an ISA instead of a student loan?

If you need financing, should you consider an income share agreement or student loans? The Consumer Financial Protection Bureau recommends exhausting all scholarship, grant, and federal student loan options first.

“While ISAs are a novel idea that attempt to mirror income-driven repayment plans that are available with federal student loans, in practice, they often lead to high costs for students who use them with few protections,” says Sanger-Hodgson.

If federal student loans don’t cover all of your educational costs, you can also look into private student loans. Income share agreements may be a good option if you expect to earn a lower salary. On the other hand, if your earnings increase during the repayment term, so will your payments.

“Depending on your income, you could end up paying far more than the cost of your education and more than you would have under a traditional federal student loan,” warns Craig.