Understanding Income Sharing Agreements: How they Work, What are the Benefits, & What are the Risks?
Educational opportunities can provide pathways to achieving a better future, but prospective students often struggle with how to pay for escalating tuition costs. Today’s students are likely aware of the larger national educational debt crisis that is projected to reach $2 trillion by 2022. Many may know of persons that have graduated with degrees but struggle to move into the life they want because of the difficulty of satisfying their monthly loan obligations. This has led increasing numbers of students to consider both alternative sources of funding as well as educational opportunities outside of traditional 4-year accredited non-profit colleges or universities, such as data science academies. Income Sharing Agreements (ISAs) have reemerged in recent years as a funding option because ISAs can be utilized to fund educational opportunities that are not eligible for federal student loans and the repayment obligations for ISA participants are calculated as a percentage of student’s earnings after completing the program.
How to ISA’s Work?
ISAs operate by providing students with the funds to cover educational costs in exchange for the student’s agreement to make future payments based on a percentage of their income over a specified period of time. The terms of each ISA will vary depending on many factors, but most do not require income sharing until the participant secures employment at a set compensation level. While in that position, the repayment amount is set as a percentage of the participant’s earnings for a certain number of payments or period of time. ISA companies market these agreements as different from loans because of these unique features and argue that ISAs allow for the opportunity to reduce student debt. As is explored in greater detail in this article, the reality is more complex and better understanding ISAs is a good first step for any person considering using ISAs to fund education costs. This article explores ISAs in greater depth, including an overview of ISAs in the larger context of educational funding, exploration of some current ISAs in data science programs and traditional 4-year degrees, and a discussion of some of the benefits and risks associated with ISAs.
Income Sharing Agreements in the Larger Context of Educational Funding
ISAs are best examined in the larger context of educational funding. Historically, many students have looked to federally-subsidized student loans as a primary source of funding for educational costs. These loans have offered benefits over private educational loans in that federally subsidized loans have rates set by Congress and are based on the individual’s enrollment in an eligible program. Unlike private loans that depend on a judgment that the borrower (or cosigner) is credit-worthy, federal loans are available to most students by virtue of their enrollment in an eligible college or university program. Significantly, not all schools or programs, including many data science programs, are considered “eligible” to participate in the federal financial loan program. Federally-subsidized student loans also offer several different flexible repayment opportunities for borrowers to manage debt if their income is insufficient to make the required payments. Some of these are income-driven repayment plans that are similar to ISAs in that repayment obligations are correlated with the borrower’s earnings after graduation (e.g., Income-based repayment, Income-contingent repayment, Pay As You Earn (PAYE), and Revised PAYE). In contrast, most private educational loans do not offer borrowers the option to change repayment amounts based on their income.
In addition to increasing concerns related to escalating tuition debt, several concrete limitations of the student loan program gave rise to the need for ISAs and alternate sources of funding for educational costs. At the outset, federal loans are subject to borrowing caps that may limit student’s ability to access the funds needed to fully finance the costs associated with their education. Students that are credit-worthy or have cosigners may be able to access additional private loans, but many students find themselves in need of additional funds even after utilizing all available loans. In addition, some students or programs are not eligible to receive federal student loans. Federal student loan rules specify that some groups of “noncitizens” are restricted from receiving aid and, generally, these loans are only available for education at accredited universities. Even at accredited institutions, certificate programs need to be approved by the U.S. Department of Education to be eligible. More broadly, however, some students able to access loans to finance education costs are questioning the wisdom of incurring large amounts of educational debt to pursue degrees that do not lead to employment that will allow them to pay it off.
ISAs are marketed as opportunities to address these gaps by covering individuals, programs and educational costs that are not serviced by federal student loans. ISAs are also characterized using terms that sound responsive to concerns about escalating student loan debt. ISA proponents can highlight that many ISAs employ earning thresholds that provide participants with an assurance that they are not required to make payments unless meeting a certain earnings threshold. Similarly, by connecting the amount of payment required under the agreement to the participant’s income, ISA obligations will not require more than a specified share of monthly income. These are attractive features to many prospective borrowers, but the specific terms of the ISA will reveal the value of these assurances.
Emergence of ISAs for Education Costs
Renowned economist Milton Friedman is often credited for the concept of ISAs through his 1955 article “The Role of Government in Education.” There Friedman argued in favor of a funding model for student education costs through which investors “could “buy” a share in an individual’s earning prospects: to advance him the funds needed to finance his training on condition that he agree to pay the lender a specified fraction of his future earnings. In this way, a lender would get back more than his initial investment from relatively successful individuals, which would compensate for the failure to recoup his investment from the unsuccessful.” Modern ISAs were born from this idea of funding a student’s education through their agreement to deduct a percentage of their future income for a specified time after graduation.
Yale University attempted a modified version of Friedman’s idea in 1971 through its Tuition Postponement Option (TPO). This program allowed undergraduates to pay off loans as a cohort, and approximately 3,300 students participated in the 1970s. The TPO specified that repayment obligations for the participants continued until the entire group’s balance was repaid, which left many members frustrated as their repayment obligations continued for many years because some in the group were unable or unwilling to pay. In the end, the TPO was considered a failed experiment but valuable lessons were learned. Contemporary ISAs have been shaped by the failures of the Yale TPO and utilize individual rather than group repayment obligations, shorter limits on the overall length of the agreement, and caps on the total contribution amount or maximum number of income share payments.
Reemergence of ISAs and Impacts on Data Science Education
The availability of high-paying data science positions has led many to pursue training programs, such as academies or bootcamps, at private, for-profit organizations. ISAs are increasingly utilized as a funding source by students learning data science because traditional federally-subsidized student loans are not available to cover tuition costs for many programs. Without available funding sources, the upfront fees excluded many persons from the opportunity to participate in such programs. ISAs have increased access to these training programs by reducing or eliminating the upfront costs for students. Data science schools also market ISAs as a way of aligning the school and student’s success because many ISAs expire. Accordingly, students that are unable to maintain employment at a specified earning threshold within a certain time period are relieved of their obligations. ISAs offered to students in data science programs typically are for shorter duration and with higher earnings thresholds than those offered to students in traditional four-year programs. In this way, the educational program is financially invested in both the quality of the training provided and student’s actual ability to secure a high-paying position in the real world.
In the context of data science training, particularly online programs, ISAs usually require low or no upfront costs to the student. To evaluate an ISA, prospective participants will also want to clearly understand when income sharing will begin after graduation, which usually involves understanding the grace period (if any) and the level of earnings that trigger income sharing requirements. Finally, the actual cap on payments, as well as precise amount of income share required and maximum number of payments, will determine how much the student actually pays in the end. While ISAs are built on the assumption that students will find employment at or above a specified earnings threshold, ISA agreements are time limited and this provides an end-point at which students that are unable to find qualifying employment (or satisfy the applicable payment cap or number of payments) are relieved of ISA obligations.
Data Science Programs offering ISAs
A sampling of ISAs at various data science programs will further illuminate how the agreements work and provide an opportunity to compare the different approaches to structuring ISAs. Readers are cautioned that these terms can change and it is always prudent to review each school’s current ISA agreement.
Lamda School utilizes an ISA that does not require upfront costs for courses or income sharing until participants secure employment earning at least $50,000 annually. ISA participants are obligated to contribute 17% of their gross income pursuant to the ISA with a total contribution cap of $30,000. The ISA ends when participants satisfy any one of three conditions: (1) contributing a total of $30,000 in income share payments; (2) completing 24 payments under the ISA; or (3) the passage of 5 years since completing the Lamda School’s program. The ISA payments have a 30-day grace period after commencing employment and are suspended if the individual loses their position or their income decreases below the threshold during the agreement. The ISA is offered as an alternative to the upfront tuition cost of $20,000, thus the ISA contributions are capped at 1.5 times the initial tuition cost.
Flatiron School offers an ISA that is similarly structured around different terms. While there is no tuition down-payment for online students, enrollment for in-person courses requires an initial payment that varies depending on the program. Students will be required to make an initial payment of $2,000 for the $15,000 Data Science Programs and $2,850 for the $17,000 Data Science Programs. (Of note, students can receive a refund of this amount if they comply with specified requirements and do not receive a job offer within six months of graduation.) After any initial payment at the time of enrollment, the ISA obligations are not triggered until the participant is in employment earning at least $40,000 annually. ISA participants contribute 10% of their monthly income pursuant to the ISA with total payments capped at 1.5 times the initial tuition cost. The ISA ends when participants satisfy any one of three conditions: (1) income sharing contributions that total 1.5 times the applicable tuition cost; (2) completing 48 payments; or (3) passage of 8 years since the expiration of the ISA grace period. The ISA agreement has a 6-month grace period following graduation for all participants and payments are only required when participants are in employment that meets or exceeds the $40,000 threshold.
General Assembly identifies several funding options for its students, including the Catalyst Program ISA. After an initial $250 deposit at enrollment, ISA obligations are not trigged until participants secure employment earning at least $40,000 annually. ISA participants are obligated to contribute 10% of their monthly earned income with total payments capped at 1.5 times the initial ISA amount. The ISA ends when participants satisfy any one of three conditions: (1) income sharing contributions that total 1.5 times the applicable tuition cost; (2) completing 48 payments; or (3) the passage of 8 years since finishing the program. As with the other ISAs, payments are only required when participants are in employment that meets or exceeds the $40,000 annual earning threshold.
The San Diego Workforce Partnership offers an ISA program available to students pursuing certificates in Front End Development, Java Programming, Digital Marketing or Business Intelligence Analysis at University of California’s San Diego Extension Programs. ISA participants are not required to pay upfront costs or begin income sharing until securing employment earning at least $40,000 annually. ISA participants are required to contribute between 6-8% of their income for 36-60 payments, but the specific percentage required and amount of payments will vary depending on the individual’s course of study. For all participants, the ISA payments are capped at 1.8 times the program cost. The ISA agreement has a 1 month grace period following graduation and payments are only required when participants are in employment that meets or exceeds the $40,000 threshold.
Make School students can finance a bachelors degree in Applied Computer Science through its ISA. As an alternative to the 2-year tuition cost of $70,000, students can elect to participate in a partial or full ISA to pay for educational expenses. ISA repayment obligations are not triggered until students are in positions earning at least $60,000 annually. ISA participants are obligated to share 20% of their gross monthly income for 60 months if they elected to pay all tuition costs through the ISA or for 30 months if they elected the partial ISA. Students can also apply for a Living Assistance ISA of $1,500 per month. Students that participate in the Living Assistance ISA during their studies at Make School are required to share an additional 5-7% of their gross income for 10 years after graduation. Most ISA agreements at Make School are capped at 2.5 times the original amount.
Sample ISA Programs Outside Data Science Programs
ISAs are also increasingly emerging as a source of funding for students attending traditional 4-year colleges and universities, although there are significant differences when compared to ISAs for data science educations. As shown through the ISAs sampled below, there is wide variability among the terms of the ISAs utilized by these schools and readers are cautioned to review the current terms of each ISA.
Purdue University began offering ISA agreements in 2016 through its ‘Back A Boiler’ program. This ISA is available to students in their sophomore, junior and senior year of studies and provides up to $10,000 in funding annually. In exchange, after securing employment earning at least $20,000 annually, ISA participants are required to share between 1.73% and 5% of their income for every $10,000 received from the ISA program. The precise amount of income share required, as well as total duration of payments (up to 10 years), varies depending on the ISA participant’s major. Generally, ISA participants from higher-paying majors, such as Engineering, will be required to share a smaller percentage of their income for a shorter period of time than ISA participants from lower-paying majors, such as English. ISA payments are capped at 2.5 times the initial ISA amount.
The University of Utah recently launched a pilot ISA program that allows for $6,000 to $20,000 in ISA funding for certain students each academic year. Only students that are within 32 credit hours of graduation in one of 18 selected majors are eligible to participate. The ISA participants are obligated to share 2.85% of their income when they begin working positions paying at least $20,000 annually, and the duration of payments ranges from 3 to 10.5 years depending on the participant’s major and the ISA amount. Participants from lower-paying majors, such as Education, are typically required to make more payments than those in higher-paying majors, such as Engineering. The ISA payments are capped at 2 times the initial ISA amount.
Messiah College has a small ISA program that is focused on students that have exhausted other borrowing and financial aid options. Each annual ISA award totals $5,000 and requires the participant’s agreement to share 3% of their income. Income sharing is triggered after participants begin working in a position that pays a minimum salary of $25,000. The ISA agreement is satisfied by making 84 payments, the passage of 14 years, or by meeting the payment cap. ISA payments are capped at 1.6 times the initial ISA amount.
Clarkson University is experimenting with an ISA program that is open to all years and majors. Under the ISA, twenty participants that are selected through a competitive process are eligible to receive up to $10,000 annually. ISA participants are required to share their income for a 10-year period after graduation. Amounts received by the student in their freshman year are repaid by sharing 1.7% of income, the sophomore year rate is 1.52%, the junior year rate is 1.50%, and the senior year rate is 1.48%. Students participating in the ISA for all four years will be required to share 6.2% of their income. Income sharing obligations are triggered after participants begin making $25,000 annually and all agreements end after 10 years. ISA payments are capped at 2.5 times the initial ISA amount.
Benefits of ISAs
There are benefits and drawbacks to ISAs. The determination of whether an ISAs is a “good idea” for a particular individual will depend on the specific terms of the ISA available to them and their personal circumstances. ISAs provide a key benefit by filling a gap in traditional federal student loans and offering funding for programs and persons that are presently excluded by virtue of federal loan rules. Particularly in the context of data science programs, these ISAs then help increase access by allowing students who otherwise could not afford tuition the ability to participate in training opportunities that can lead to high-paying employment. In many instances, ISAs eliminate upfront costs to students and do not require income sharing unless the individual has obtained employment at a specified rate of compensation. For data science programs in particular, the earnings thresholds are set to reflect a ‘real’ commitment to a higher level of earnings, but participants then must share a significant portion of their gross monthly income under the agreement.
ISAs can also offer an attractive feature to participants by linking the payment obligation to their actual income. Schools with ISAs will often highlight how this means that they are invested in the education they provide because the actual amount received from students is aligned with the student’s future financial success. The ISAs reviewed above all ended after a set period of time, usually ten years or less, and this, along with earning thresholds, are additional features that can be highlighted as evidence of the school’s belief that their training will lead to their student’s ability to find employment in the near future. These strands allow for ISAs to be marketed around themes that resonate for many contemplating higher education to pursue better job opportunities, but a more basic question is whether the ISA makes financial sense for the student.
Drawbacks of ISAs
Potential to pay much higher overall tuition
Some critics of ISAs have highlighted that students often end up paying more with an ISA than they would have by taking out a loan. Notably, some of the main benefits of ISAs are available in federally subsidized loans that already offer income-driven repayment options while still providing protections for low-income borrowers and interest rates that are lower than those available through private investors. Helpful illustrations of how to compare the costs of ISAs to student loans can be found here and here. Understanding whether this is the case will depend on the specific terms of each ISA, including the cap on total payments, specific amount of income share required, duration of agreement and required amount of payments. As was illustrated in the samples identified above, different ISAs employ varying approaches to recapturing the initial investment in students. Data science schools often allowed for the opportunity to pay almost all costs through ISAs that required higher rates of income sharing for shorter periods of time (or for a specified number of payments). In the context of accredited 4-year universities, ISA agreements usually required a lower rate of income sharing for longer periods of time. Understanding the payment cap allows participants to discern a hard limit on the total amount that they may be required to contribute. Significantly, many ISAs at traditional universities had caps that ranged up to 2.5 times the total loan amount. ISA participants that end up reaching these payment caps would find that their payments approximated a loan at exceedingly high interest.
Students may be required to accept a job they do not want
Another significant factor to understand when exploring participating in an ISA regards the types of employment that ISA participants are required to accept. The specific terms in some ISAs may require students to accept employment in a positon they do not want or under terms that they find unfavorable. These ISA participants may be frustrated after working hard to complete a program only to be required to accept the first job offered or a role that does not match their personal goals.
ISAs require sharing “gross” monthly income
Potential participants should consider that many ISAs specifically require sharing a percentage of the participant’s “gross” monthly income, which means that the impact may feel more significant after taxes and other monthly obligations are taken into account. This latter point is of particular concern for ISA participants that also have student loan obligations.
ISAs are not currently regulated
ISAs remain largely unregulated, which stands in contrast to the larger student loan and lending backdrop. Some ISA companies have asserted that federal consumer protection laws, such as the Equal Credit Opportunity Act’s prohibitions on discriminatory lending and the Truth and Lending Act’s guidelines regarding disclosures, are not applicable to ISAs. This is concerning as ISAs have already been criticized for a lack of clarity regarding terms and conditions as well as discrimination in the context of ISA rates and access. Indeed, some commentators have documented how the different terms of some ISA programs for persons depending on their major can have a disparate impact on women and persons of color. One such analysis demonstrated how the variable ISA terms offered to students at one accredited institution meant that ISA participants in male-dominated fields, such as engineering, paid over $1,000 less for the same initial $10,000 amount than ISA participants in women-dominated fields, such as education. In addition, colleges that only offer ISAs to certain majors may disproportionately limit ISA participation for women and persons of color because many majors are stratified by race and gender.
These concerns related to ISAs, combined with growing numbers of students considering ISAs as a funding source, have already led to proposed federal legislation. Senate legislation introduced in June 2019 sought to exempt individuals earning less than 200% of the federal poverty limit from incoming sharing obligations, cap income sharing at 20%, and assign oversight of ISAs to the Consumer Financial Protection Bureau. Consumer protection advocates and other legislators have argued that these proposals do not provide sufficient protections and are expressing concerns about additional common features of ISAs that can impact participants, such as mandatory arbitration provisions and restrictions on filing for bankruptcy. State law will also impact what ISAs look like moving forward. For example, New York law specifically prohibits schools from charging different rates of tuition to its students, which further complicates an already unclear background for ISAs. Accordingly, while largely unregulated now, the legal landscape for ISAs is likely to develop in the near future.