Income Share Agreements (ISA’s) have become an increasingly popular credit option among public universities, as well as a new financial product offered to for-profit colleges and career schools. Under an ISA, students pledge a predetermined portion of their future income to pay for their present-day tuition. Payments are typically 5-10 percent of the student’s annual salary for a set number of years after graduation.1
Repayment terms often vary depending on the graduate’s earning potential. For example, a philosophy major typically will pay a higher percentage of salary than an engineering student.
A typical ISA looks something like this: Martha, a coding school student, chooses an ISA, rather than a traditional loan, to pay the $15,000 tuition required to attend. Martha is required to pay 10 percent of her gross income for 48 months after graduating. If her annualized income falls below $30,000 in a given month, she doesn’t have to pay. When her income exceeds $30,000 again, she will need to resume making payments. Martha’s total payments are capped at 200% of her tuition.
When Martha enrolled, she could have signed an installment contract with the same 48-month term, an APR of 8.99%, and a monthly payment of $373.20. So which option was better?
Traditional Loan Option
At $373.20 per month for 48 months, Martha would have paid a total of $17,913.81, or 119% of her tuition.
ISA Option
The average annual salary for a software developer is $59,000. If Martha earned an average of $59,000 during the repayment term, she would pay $23,600, or 157% of her tuition.
For both Martha and her lender, the contract is a gamble. If Martha goes on to a lucrative job, her lender earns more (limited by the 200% cap) and Martha risks paying more (as she did in the example above). But if Martha earns very little and pays back less than he or she received, her lender absorbs the loss.
ISAs seek to align the goals of students with their expectations from the education provider they attend. Proponents note that colleges have a financial stake in the success of students whose education is funded this way, something that is not the case with regular student loans. With income-share agreements, schools make less if their graduates make less and more if they make more.2
There are also downsides. In addition to the student’s risk of paying more as a reward for earning a higher salary, some ISA’s have provisions that pause the repayment period during months where people don’t earn enough. This could effectively extend an income-share agreement for someone’s entire working life. Payments as high as 20 percent could last longer than a decade.2
Repayment is also more complicated than with a regular student loan, because students have to regularly provide tax returns, payroll stubs or other evidence of how much money they earn. Failure to provide that information in a way that meets the exact terms of the agreement could throw the contract into default, converting it into a debt subject to collections, even wage garnishment.
Another potential risk is the possibility of inequities among repayment terms among similar students attending different schools. A study performed by the Student Borrower Protection Center (SBPC) provided examples tougher repayment terms for students of historically black colleges and universities (HBCU’s), despite choosing the same major as a student who did not attend a HBCU.
A defining feature of the marketing of ISAs is the idea that the contracts are not student loans or not even a form of credit. However, legal experts increasingly agree that ISAs are simply another form of consumer credit that are subject to consumer protection laws like the Truth in Lending Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, and the Consumer Financial Protection Act of 2010.
What’s the right answer? Income Share Agreements do offer unique alignment between a student’s desired outcome and his/her school’s responsibility to offer high-quality training. But any student or school should be aware that they are a new, unregulated financial product with no shortage of risks and uncertainty.
1 A Novel Way to Finance School May Penalize Students From H.B.C.U.s, Study Finds, New York Times, March 25, 2021
2 New Kind of Student Loan Gains Major Support. Is There a Downside?, New York Times, December 16, 2019
3 See generally Aryn Bussey, “Educational redlining? The use of educational data in underwriting could leave HBCU & MSI graduates in the dark”, Student Borrower Prot. Ctr. (Jul. 24, 2019), https://protectborrowers.org/educational-redlining/.
Are Income Share Agreements a Healthy Alternative to Traditional Student Loans?
in Consumer Finance, Higher EducationIncome Share Agreements (ISA’s) have become an increasingly popular credit option among public universities, as well as a new financial product offered to for-profit colleges and career schools. Under an ISA, students pledge a predetermined portion of their future income to pay for their present-day tuition. Payments are typically 5-10 percent of the student’s annual salary for a set number of years after graduation.1
Repayment terms often vary depending on the graduate’s earning potential. For example, a philosophy major typically will pay a higher percentage of salary than an engineering student.
A typical ISA looks something like this: Martha, a coding school student, chooses an ISA, rather than a traditional loan, to pay the $15,000 tuition required to attend. Martha is required to pay 10 percent of her gross income for 48 months after graduating. If her annualized income falls below $30,000 in a given month, she doesn’t have to pay. When her income exceeds $30,000 again, she will need to resume making payments. Martha’s total payments are capped at 200% of her tuition.
When Martha enrolled, she could have signed an installment contract with the same 48-month term, an APR of 8.99%, and a monthly payment of $373.20. So which option was better?
Traditional Loan Option
At $373.20 per month for 48 months, Martha would have paid a total of $17,913.81, or 119% of her tuition.
ISA Option
The average annual salary for a software developer is $59,000. If Martha earned an average of $59,000 during the repayment term, she would pay $23,600, or 157% of her tuition.
For both Martha and her lender, the contract is a gamble. If Martha goes on to a lucrative job, her lender earns more (limited by the 200% cap) and Martha risks paying more (as she did in the example above). But if Martha earns very little and pays back less than he or she received, her lender absorbs the loss.
ISAs seek to align the goals of students with their expectations from the education provider they attend. Proponents note that colleges have a financial stake in the success of students whose education is funded this way, something that is not the case with regular student loans. With income-share agreements, schools make less if their graduates make less and more if they make more.2
There are also downsides. In addition to the student’s risk of paying more as a reward for earning a higher salary, some ISA’s have provisions that pause the repayment period during months where people don’t earn enough. This could effectively extend an income-share agreement for someone’s entire working life. Payments as high as 20 percent could last longer than a decade.2
Repayment is also more complicated than with a regular student loan, because students have to regularly provide tax returns, payroll stubs or other evidence of how much money they earn. Failure to provide that information in a way that meets the exact terms of the agreement could throw the contract into default, converting it into a debt subject to collections, even wage garnishment.
Another potential risk is the possibility of inequities among repayment terms among similar students attending different schools. A study performed by the Student Borrower Protection Center (SBPC) provided examples tougher repayment terms for students of historically black colleges and universities (HBCU’s), despite choosing the same major as a student who did not attend a HBCU.
A defining feature of the marketing of ISAs is the idea that the contracts are not student loans or not even a form of credit. However, legal experts increasingly agree that ISAs are simply another form of consumer credit that are subject to consumer protection laws like the Truth in Lending Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, and the Consumer Financial Protection Act of 2010.
What’s the right answer? Income Share Agreements do offer unique alignment between a student’s desired outcome and his/her school’s responsibility to offer high-quality training. But any student or school should be aware that they are a new, unregulated financial product with no shortage of risks and uncertainty.
1 A Novel Way to Finance School May Penalize Students From H.B.C.U.s, Study Finds, New York Times, March 25, 2021
2 New Kind of Student Loan Gains Major Support. Is There a Downside?, New York Times, December 16, 2019
3 See generally Aryn Bussey, “Educational redlining? The use of educational data in underwriting could leave HBCU & MSI graduates in the dark”, Student Borrower Prot. Ctr. (Jul. 24, 2019), https://protectborrowers.org/educational-redlining/.
How Will the American Rescue Act Plan Affect Career Schools?
in Consumer Finance, Higher Education, LegislationThe American Rescue Plan Act was signed by President Biden on Wednesday, March 11. Part of the plan contains changes that could soon impact how private career schools are able to treat financial assistance for active military and veterans. Paramount Capital Group is here to step in and provide alternative solutions to student financing should these changes come to fruition. Continue reading to learn about how the recent bill affects you and what we can do to help.
The so-called “90-10 loophole” was a notable topic at the marathon Senate session over the weekend. The 90-10 rule requires that at least 10 percent of an institution’s revenue must come from non-federal sources.
The current rule excludes GI Bill and Pentagon tuition assistance programs from federal revenue, allowing colleges, technical, and career schools to offer programs to service members and veterans without limitation.
The original House bill was amended Saturday in order to give the Education Department, for-profit colleges, and veterans time to adjust to the new policy, and to allow for potential further bipartisan legislation.
The amendment, sponsored by Senators Tom Carper and Jerry Moran, would postpone the change to allow for a rulemaking process to begin Oct. 1 and delay financial penalties for noncompliance until 2024.
Wondering what to do about alternative tuition financing if the new legislation impacts your funding? Paramount Capital Group offers finance solutions to career and technical schools, including gap loan purchasing and servicing to help schools maintain 90-10 compliance.
Could President Trump’s Proposed Budget Cuts Affect Your Trade School?
in Consumer Finance, Higher EducationIn late May, President Trump released his first full budget proposal, titled “A New Foundation for American Greatness.” The plan includes significant cuts to government agencies to free up funds for increased defense spending. Trump’s 2018 budget calls for a 21% decrease in Labor Department funding, including a $1.3 billion cut to programs associated with the Workforce Innovation and Opportunity Act (WIOA).
WIOA, which was signed into law in July 2014, funds grants that help job seekers get the training, education, and support they need to secure employment. Thus, cuts to WIOA funding mean cuts to critical job-training programs—like those offered by trade schools. Without WIOA funding for vocational training, many trade schools could experience a drop in enrollment. In turn, industries that rely on the skilled labor force could experience a shortage of properly trained workers.
The good news? The President’s proposed budget isn’t set in stone. According to Senate Budget Committee Chairman Sen. Mike Enzi (R-Wyo.), “The President’s budget is a suggestion. We will take a close look at his budget, but Congress is mandated by the Constitution with key spending responsibilities and will ultimately decide what the nation’s fiscal priorities will be.” This means the WIOA could still be fully funded in 2018.
The bad news? The proposed budget cuts indicate that the current administration doesn’t fully understand the benefits of vocational training and apprenticeships. To turn this around and influence the President’s workforce development approach, trade schools need to step up and spread awareness of the viable career paths that exist beyond a traditional four-year college education.
Has Your Trade School Adopted Modern Learning Principles?
in Higher EducationImportant shifts are happening in education today. With access to a world of knowledge online and opportunities to obtain degrees and certifications from countless schools and institutions, modern students are empowered to take ownership of their learning.
What does this mean for your trade school?
To be effective, schools need to shift their focus towards developing students as engaged learners. Educators must stray from irrelevant, dated systems of education and develop new ways to prepare students for the ever-evolving workforce.
According to Gallup, only a third of business owners say students are graduating with the necessary skills to succeed in their companies. How can you reverse this trend and differentiate your school as an innovative educator? Will Richardson and Bruce Dixon, both recognized as thought leaders in education and learning technology, recently published a whitepaper entitled, 10 Principles of Modern Schools. These 10 principles detail how education providers can adapt to today’s modern world and help students live up to their potential as learners:
To learn more about creating a culture of modern learning at your trade school, check out Modern Learner’s e-book below.
“10 Principles for Schools of Modern Learning”