Upsides & Downsides of Student Loan Income Share Agreements
Both lenders and college students are getting creative about student loan repayment - and why not?
With outstanding student debt at $1.56 trillion at the start of 2020, both ends of the student loan agreement are looking wobbly, and sometimes drastic action is a necessity with $50,000 or so in future student loan debt on the line.
So it goes with student loan income share agreements.
These arrangements basically enable student loan borrowers to promise a slice of their future career earnings against their student loans, thus reducing overall student loan repayment burdens.
That's the idea in theory, anyway. Will it work in the real world, especially with so many college grads out of work in mid-2020?
"Maybe", says Jocelyn Paonita, founder of the Scholarship System student loan advisory site (she also graduated college with zero student loan debt.) But watch out for tripwires along the way that can make income sharing agreements more expensive than traditional student loan payments.
"This is really a student loan alternative, as an income share agreement works differently," Paonita says. "Instead of owing a set debt, students promise a percentage of their future earnings for a defined period."
Here's how Paonita views ISA's, from a "pros versus cons" perspective.
- Adjustable payment amounts. Income share agreements use a
percentage of pay to calculate what a graduate owes that month. "This can offer some level of security if a student takes a lower-paying job - even down the road - and is making the monthly payments based on their income," she says.
- Protection when unemployed. Similarly, if a student does not have a job, some ISAs would not require any payment.
- You get help. ISA's incentivize colleges to help students find a well-paying job - something they should be doing more aggressively, anyway.
- You may have a cap. Some ISAs have a payment cap limiting how much a student will pay back on a student loan.
In some ways, income-based payment agreements can become more expensive than student loans, Paonita says.
- Limits on funds. Some schools limit how much can be borrowed through an ISA while others do not. "That opens the door to excessive borrowing on the part of some cash-strapped students," she notes.
- Financial damage down the road. While there are protections in cases of unemployment or less pay for borrowers, there can be extreme consequences for missed payments including late fees, damages to their credit score, and even default.
- Higher potential debt. Students can end up paying a larger amount overall than if they simply borrowed student loans. "Thus, comparing both ISA's and traditional loans in the total amount paid at the end of the line is very important for students considering this option," Paonita says.
Talk it Out With a Pro
ISA or no ISA is not an easy call for students and their families.
That's why talking things over with a college financial aid specialist and/or a financial planner is the way to go - before you commit to a student loan income sharing agreement.