An ISA is a financing tool that ties payments for education to success after school. With an ISA, borrowers agree to pay a small percentage of income for a fixed period after graduation — there is no set principal or interest that must be repaid. Income Share Agreements shift the risk of educational financing from students to funders.
If a borrower ends up at a low-paying job or, worse, unemployed, they are protected from unaffordable payments and spiraling interest rates. If a borrower is financially successful after graduation they pay relatively more, but will never pay in excess of the predefined payment limits.
Because payment levels are set based on a percentage of income, Income Share Agreements resemble income-driven loan repayment plans such as those used by the U.S. Department of Education. But an Income Share Agreement is not a loan. Unlike student loans, Income Share Agreements do not require or involve:
- A fixed, principal balance (e.g., the original funding amount) that must be paid down
- Perpetual debt that lasts until the balance has been paid off
- Interest rates
- “Negative amortization,” a term that describes when the principal balance of a loan rises because the student’s payments are less than the interest due
- The use of student or family credit scores
Income Share Agreements will not replace traditional student/consumer loans, but will rather serve as an alternative model whose prevalence varies based on the application and the needs of a given customer segment.
For individuals who cannot easily bear the risk that a given higher education program will not deliver a financial outcome that offsets the upfront cost, or for individuals who can no longer access affordable loan financing for whatever reason, Income Share Agreements will serve as a critical alternative.
Outcome provides a full service platform to design, underwrite, and implement ISA programs. At each stage of the ISA creation process, we work with schools on ISA design, regulatory compliance, and the tools to launch and service a successful ISA program.
The exact structure and terms of an Income Share Agreement can and will vary based on the education program, the investor, and potentially the individual. This is a very high touch product that requires custom inputs and bespoke terms. However, these agreements generally include all of the following parameters:
- The amount of the upfront payment, which is not to be confused with a principal amount on a loan
- The percentage of earned income that will be paid (usually calculated using monthly earned income)
- The fixed number of payment periods over which payment will be owed (stated in months or years)
- The maximum term over which payments will be owed, after which the agreement is terminated regardless of the number of realized payment periods
- The minimum earnings amount that must be achieved for payments to be made (often set at $20,000/year)
- Upper bounds placed on how much borrowers can pay in an ISA contract
Many factors contribute to a thoughtfully designed ISA that is best suited to an academic program and the student body it serves. Schools may provide the following data to assist in a tailored program design approach:
- Degree completion rates
- Career placement rates
- Starting salaries and longitudinal earnings for recent graduates
Whether schools can provide some or all of these metrics, we work to understand the needs of each program through data and qualitative collaboration.
Higher education providers may choose to finance ISAs in several ways according to their needs, including:
- Social impact funds
- Third-party investors
Each school selects ISA participants differently. Some schools may require students to enroll in a career services program to qualify for ISA funding. Schools may make ISA funding available to students only after they have completed certain degree requirements. Others make ISAs available to all students who meet the financial requirements of the ISA application.
Yes. While ISAs seek to eliminate need-based defualts, which arise when borrowers are simply unable to repay a financial obligation due to insufficient personal finances, borrowers enrolled in an ISA can still default.
Qualifying borrowers who earn above the income threshold and have not met the Number of Monthly Payments or Aggregate Payment Cap must make payments. Failure to do so may lead to default.
While each ISA program is different, most ISA programs include payment limits that cap the amount borrowers can pay either in a given year or in total throughout the entire ISA contract. While the dollar amounts of payment limits vary from program to program, prospective borrowers should carefully consider the cap before enrolling in an ISA contract.
Your payments are only due if you are currently earning above the income threshold during the time period described in your ISA contract. If you are not working or earning less than the income threshold, your payment obligation is zero. Zero dollar payments do not count toward your required Number of Monthly Payments, however payments are only due up to the final month of the Contract Term. After the Contract Term has ended, you won’t be required to make any further payments, under any circumstances.
An ISA ends when any one of the three milestones below are reached:
- The number of non-zero dollar payments made equals your pre-set Number of Monthly Payments
- The total amount you have paid hits the Aggregate Cap
- The amount of time that has passed reaches your pre-defined Contract Term
An ISA obligation is over whenever any of these milestones are reached, regardless of the status of the other two milestones.
This means that the Contract Term is the longest amount of time an ISA can last, but only if one of the other two milestones aren’t reached first.