The terms and regulations for education loans have historically been a subject of some debate, particularly the prohibitive cost they put on advanced schooling, making it out of reach for many students. Traditional student loans are something of a roll of the dice for lenders because they're not "anchored." They're not tied to collateral that lenders can repossess in the event of default.
The concept of income share student loans is intended to rectify some of these issues.
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Traditional Student Loans
Understanding income share loans begins with the nuts and bolts of their predecessor: the traditional student loan. The federal government has been involved with regulating these loans since 1958 when the federal student loan program was born. One of the things the program provides for is low interest on these loans – a lose/lose for lenders who already have no collateral. The federal government originates nine out of 10 student loans a year as a result, without a whole lot of competition from private lenders that want to get involved.
An additional issue has been that these traditional loans can become virtually uncollectible if the borrower doesn't complete school and achieve a degree. These borrowers are less likely to have the income to support the payments, and the loans are structured so that all borrowers make the same payments when they have the same balances, regardless of their earnings. But keep in mind that the federal government can and will still come after student borrowers who default on these loans by garnishing 15 percent of their wages and seizing tax refunds.
Consider also: How to Get Rid of Student Loan Interest and Penalties
Income share student loans are a relatively new concept. They give students an alternative, taking quite a different approach to repayment terms. First, they're interest-free. Another big factor is that payments are equivalent to a percentage of the borrowing student's income after graduation, degree in hand, for a predetermined period of years. No job means no payments. Students pledge a set portion of their future earnings in exchange for having their tuition paid now.
You might need a $30,000 loan to begin your education. A lender will give you that money, and you sign an income share agreement, or ISA, promising to repay a specified percentage of your earnings when you've graduated and find a job.
Your payments will be significantly more if you land a position paying $95,000 a year rather than $30,000 a year. The percentage you pay doesn't increase with the more you earn. Your payment will increase, however, if you get your foot in the employment door with that $30,000 job and you're earning $95,000 a year later. Remember, payments are a percentage of what you borrowed. Your monthly payment amount can bounce up and down, corresponding with your earnings. But the option is intended to eliminate crippling loan payments for those who can least afford them.
The percentage of your pay that you owe monthly might work out in the neighborhood of about 10 to 15 percent over a period of as long as eight years. But here's a word of warning: That original term might extend beyond eight years if you earned so little during that time that you didn't make payments in some years. You might not have to pay anything during the early years of the term when you're barely earning. Some income share loans have income thresholds beneath which you don't have to make payments. You'd be off the hook with that $30,000 salary if the threshold on your loan is $40,000. There's no upper cap on earnings, however.
How and Where to Apply
Your best bet for finding an income share loan is to begin with schools you're thinking of applying to. Approximately 60 universities, community colleges and coding schools (think computer programming here) offer these programs, including Purdue. The Purdue program is backed by investors, including the Purdue Research Foundation, alumni and a dedicated hedge fund. And legislation is increasingly being introduced to make ISAs available in the private market.
Some loans do require that you take a problem-solving type of test for acceptance – a sort of guarantee that you've got the chops to succeed in school and potentially have adequate earning potential.
Consider also: How to Go Back to School With Unpaid Student Loans
- Manhattan Institute for Policy Research: The Future of Income-Share Agreements ¬– Policy and Politics
- The Hechinger Report: To Pay for College, More Students Are Promising a Piece of Their Future to Investors
- Student Borrower Protection Center: Income Share Agreements
- American Enterprise Institute: Replace the Federal Student Loan System With an Income Share Agreement Program
- Purdue University: Income Share Agreements
- San Diego Workforce Partnership: The Workforce Income Share Agreement Fund
- NCLC National Student Borrower Assistance: Administrative Wage Garnishments
- NCLC Student Borrower Assistance: What Special Powers Does the Government Have to Collect Student Loans?