Income Share Agreement: What Is It?

What Is an Income Share Agreement?

Through an income share agreement (ISA), a student agrees to pay for their college education, or a portion of their education, by making pre-determined payments after graduation based on a percentage of their income. The payments are set up to reflect what a payment would be for a similar private loan.

Many colleges and universities perform student learning outcomes-based evaluations of their programs to prove themselves worthy of their accrediting bodies. Income share agreements encourage even greater transparency because students need positive outcomes from their colleges and universities to get a job that helps pay their post-graduate income share agreement.

How Income Share Agreements Work

Income share agreements allow a student to pay for their college education on the back end of their education with their own earnings, instead of on the front end of their education with borrowed money that accrues interest charges.

Income share agreements are not embraced by all colleges and universities. Purdue University offers a limited income share agreement program. Since its inception, Purdue has issued more than 1,200 funding contracts in more than 150 majors. They provide funding for a student’s education, or part of it, and are paid back through fixed payments at a fixed interest rate after graduation and upon employment. The University of Utah offers income share agreements for selected majors.

Private providers also offer ISAs that can be used at any school. As a student, you may wind up paying more or less than the cost of your education, depending on the terms of your ISA contract. Payments can extend for as much as 10 or 20 years, depending on the terms of the agreement.

Alternatives to Income Share Agreements

Students may compete for scholarships, hoping to get a “full-ride,” academically or athletically, for their undergraduate studies. However, if a student doesn’t get a scholarship and lacks resources for tuition and other expenses, they must apply for student loans.

The parents can also apply for the parent’s part of the student loan package, the PLUS loan. These loans allow parents to borrow enough money to fund whatever they need is not met by other financial aid programs, although they come at high interest rates.

Disadvantages of Income Share Agreements

There is a concern that just like student loan programs, income share agreements can cause colleges and universities to become even less sensitive to the high cost of college education. The so-called Bennett Hypothesis, put forth by former US Secretary of Education William Bennett, states that for every dollar of student loan money available, college tuition and fees rise.

There is a fear that private schools in particular may raise the price of tuition and fees since there is a virtually unlimited supply of money available to students through private lenders offering income share agreements.

In 2020, the Student Borrower Protection Center and National Consumer Law Center filed a complaint with the Federal Trade Commission (FTC) seeking an investigation into the practices of Vemo Education, a private ISA broker. The complaint accuses us of systematically underestimating future earnings and overestimating loan costs to make it appear that ISAs are more affordable than PLUS loans.

There were two bills introduced in Congress in 2017 to regulate income share agreements to some extent. Neither has progressed, although both place a cap on the terms ISAs can offer students. They also addressed the legal uncertainty surrounding income share agreements and the entrants into the income share agreement marketplace.

Lumni is a dual-sided marketplace that connects students who are interested in income share agreements with institutional sources of capital. Upstart, another ISA provider, shifted its offering to an alternative type of loan.