Summary

Income Share Agreements (ISAs) have been officially deemed a form of student loan by a federal regulatory agency, but they can offer an alternative to traditional student loans under the right conditions. Unlike conventional loans, ISA repayments are tied to post-college earnings, making the comparison complex but potentially beneficial for those with specific career paths.

This guide breaks down the costs associated with ISAs compared to federal and private student loans. It examines scenarios for different income levels and ISA percentages to clarify when an ISA might be a more economical option. Key takeaways, comparison tools, and tips for estimating potential costs with an ISA are included to assist borrowers in making informed decisions.

💡 How Much You Might Pay with an ISA

To assess ISA repayment costs, let's explore how much different earners would owe on a $20,000 ISA over a 10-year repayment period. Three income levels ($38,000, $52,000, and $75,000) are used to represent low, middle, and high incomes, with a 4% annual salary growth assumption. The ISA repayment is calculated at three levels: 3%, 5%, and 10% of income.

For a starting salary of $38,000, total repayments range from $13,687 (3%) to $45,623 (10%). With a $52,000 income, this range shifts to $18,730 for 3% and $62,432 for 10%. Higher earners ($75,000) may pay from $27,014 to $90,046 depending on the percentage applied. Generally, ISAs benefit lower earners or those with smaller income share percentages. However, high earners with higher percentage terms often repay significantly more than the initial $20,000, making it essential to secure an ISA with a cap on total payments.

Takeaways:

• ISAs are most advantageous for lower earners or those with low percentage terms.

• Securing a repayment cap on an ISA is crucial to avoid excessive payback amounts.

Key Terms

• ISA (Income Share Agreement): A type of loan where payments depend on future income rather than interest rates.

• Payment Cap: A limit on the total amount repayable on an ISA, usually exceeding the loan’s principal.

• Percentage Term: The percentage of income that an ISA borrower commits to repayment each year.

🔍 How ISAs Compare to Student Loans

ISAs work best as a supplement to federal undergraduate loans, not a full replacement. Comparing a $20,000 ISA with federal PLUS loans and private student loans highlights the difference. A 10-year, $20,000 PLUS loan with a 7% APR costs $27,866 overall, while a private loan with a 9% APR amounts to $30,402. Refinancing a private loan after two years to a 5% APR results in a $28,091 repayment.

Under specific conditions, ISAs may cost less, especially for high earners with a low 3% income share. Lower earners also benefit if their terms are at 3% or 5%. However, low-income earners are less likely to receive these more favorable terms, making PLUS or private loans potentially cheaper options for these individuals.

Takeaways:

• ISAs are generally cheaper for high earners with low income share terms (3%).

• Lower income earners may benefit more from traditional PLUS or private loans.

Key Terms

• Federal PLUS Loan: A type of federal loan available to parents and graduate students, usually with a higher interest rate.

• APR (Annual Percentage Rate): The yearly interest rate applied to a loan.

• Refinancing: Replacing a loan with a new one at a lower interest rate to reduce total payments.

📊 Estimating Your ISA Costs

ISAs lack traditional interest rates, so assessing their total cost can be tricky. To decide if an ISA is right for you, it's essential to estimate your post-graduation income. Begin by researching your school's employment outcomes using the Department of Education's College Scorecard, which offers program-specific salary data. For instance, University of Utah film students earn a median salary of $23,000, while computer science graduates make about $73,000.

Use tools from the Bureau of Labor Statistics to find median salaries and job outlooks in your field, then verify this data with projected income figures from the ISA provider. Some providers share this data directly, but you may need to ask to confirm if the numbers are realistic for your anticipated career.

Takeaways:

• Project your future earnings to compare potential ISA repayment costs accurately.

• Use available resources like the College Scorecard and Bureau of Labor Statistics for reliable income estimates.

Key Terms

• Department of Education’s College Scorecard: A resource providing data on salary outcomes for graduates by school and program.

• Bureau of Labor Statistics: A government database with salary information and job outlooks for different professions.

• Projected Salary: The expected income level for a recent graduate based on education and career field.

Conclusion

ISAs can offer a flexible and potentially affordable alternative to student loans, especially for students who expect higher post-graduation incomes. Lower-income earners or those with high-percentage ISA terms may find traditional student loans more cost-effective in the long run. When deciding between an ISA and a conventional loan, thoroughly estimate your earning potential and ensure any ISA has a repayment cap.