The Income Share Agreement Model: A New Way to Pay for Education
The cost of attending college has been rising steadily over the years, leaving many students with hefty debt burdens upon graduation. The average student leaves school with over $30,000 in student loans. The income share agreement (ISA) model has emerged as a potential solution to this problem.
What is an Income Share Agreement?
An ISA is a contract between a student and an investor where the investor pays for the student’s education in exchange for a percentage of the student’s future income for a set period of time. The student is not required to pay back a fixed amount of money, but rather a portion of their earnings, thus making it a more flexible option.
How Does an ISA Work?
The terms of an ISA vary by institution and investor, but generally, students agree to pay a percentage of their income above a certain threshold for a set number of years. The percentage and length of the repayment period are determined by the income share agreement. For instance, a student may agree to pay 10% of their income for five years.
Investors set the terms of the agreement based on the student’s estimated future earnings potential. For example, a student with a degree in a high-paying field like engineering may have a higher percentage or shorter repayment period than a student studying social work.
What Are the Benefits of an ISA?
The ISA model provides several benefits for students and investors. For students, it offers a more flexible and affordable option for financing their education. Since repayment is based on income, students are not required to pay back a fixed amount of money, and payments are tied to their ability to pay.
Moreover, since investors pay for a student’s education, students are not required to take on debt. In contrast, traditional student loans accrue interest over time, and students are often required to make payments regardless of their employment status or income.
For investors, ISAs provide an opportunity to invest in students’ education and reap returns based on their future earnings. Since investors are taking a risk, they carefully consider a student’s potential earnings before deciding to invest.
Are There Any Downsides to the ISA Model?
One downside of the ISA model is that it is a relatively new and untested form of financing. There are still questions about how well it will work in practice and whether investors can accurately predict a student’s future earnings.
Additionally, since repayment is tied to income, students may pay more overall if they have a higher-paying job if they’re not earning as much, they will pay less. This can be seen as a disadvantage from an investor’s point of view.
Conclusion
The income share agreement model offers a promising new way to finance education. It provides an alternative to the traditional student loan model by making payments more flexible and tied to a student’s income. However, it is still a new model and requires careful consideration by both students and investors before deciding to participate.