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“I just heard about Income Share Agreements. How do I know if my daughter qualifies for this? She is a junior in high school. Is this better than taking out a student loan?”

Let’s start by defining what an income share agreement (ISA) is. ISA’s are contracts offered through the specific college or university the student will attend that offer upfront money to a student (similar to a loan).

The ISA organization will provide a borrower with a fixed amount of money in return for a percentage of their income for a fixed number of years. The terms of the ISA contract, percentage of income and duration of collection, are determined on a case by case basis.

Generally, the repayment amounts are capped at 2.5 times the original amount of money given to the student. ISA’s also have a minimum income threshold, meaning if a borrower makes less than a certain amount no payment will be collected.

ISA’s are typically offered to students when the estimated cost of attendance exceeds the funds available via federal student aid (like federal student loans, Pell Grants, etc) and scholarships. ISA’s are best-suited as an alternative to private and potentially parent PLUS loans.

The appeal of ISA’s

ISA’s put some accountability on the college or university to ensure a student’s financial success after graduation.

If the university wants to get paid at all they need to ensure the graduate makes more than the minimum threshold. The more financially successful the graduate, the more money the university will collect.

ISA’s provide a safety net to borrowers who don’t anticipate being able to get a high-paying job after graduation.

Higher education can have social value beyond the financial return on investment and some individuals choose to pursue their degree for that purpose. If a borrower is approaching a low-paying field ISA’s can lessen the crushing weight of the cost of their education.

The drawbacks of ISA’s

You could end up paying more than you would under an alternative loan option.

Let’s say Jane borrows $32,000 and get’s her degree in Early Childhood Education from Purdue (one of the universities offering ISA’s). Based on Purdue’s comparison tool under an ISA of 14.46% she would repay $52,196 while under a Parent PLUS loan she would repay $50,107. That means the ISA would cost $2,000 more than repayment under a Parent PLUS loan and she would be out of debt about four months sooner.

An ISA is not a good choice if your daughter plans to graduate with a high-paying job relative to her debt.

In this scenario it is almost certain she will pay more under an ISA than she would under an alternative loan type.

ISA’s are meant to protect borrowers from low income but if they’re combined with federal student loans they could increase the financial burden extensively.

The worst case scenario would be a borrower with federal student loans being repaid under an income-driven repayment plan and another amount under an ISA contract. The monthly payment for the federal loans and the ISA are calculated based on borrower income and don’t consider other monthly payments. So a borrower could have to repay $387 a month under their income-driven repayment plan and have to pay another $417 a month under their ISA contract which may not be affordable.

My final advice

ISA’s aren’t competitive compared to the federal student aid available to borrowers but can be competitive when compared with private student loans.

If your daughter is considering a degree that doesn’t have strong job prospects and may offer a lower income an ISA can be a reasonable strategy to “top off” her available federal student aid.

However, I would argue that needing “top off” funds of any kind (Parent PLUS, private student loans, or an ISA) is a major red flag that directs a borrower to seek out a lower cost alternative, find scholarships, or ensure the job prospects for that degree pay well enough on graduation to repay her debt.