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About Income Share Agreements
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Background:
Federal student loans offer income-based repayment (IBR) as a tool to protect borrowers that lets them set their monthly payments at an affordable percentage of their income and have any balance remaining after 20 years forgiven.
Yet, many students choose to take out private student loans either as a supplement or an alternative to federal loans. In 2013, the Consumer Financial Protection Bureau estimated $165 billion in outstanding private student loans, and the College Board estimates $6.2 billion in new private loans made in the 2012-2013.
Private student loans rarely offer protections to ensure a student’s payments are affordable; as a result, students easily become trapped with unmanageable debt burdens.
Recently, ISAs have emerged as an alternative option offering protections similar to IBR repayment of a federal student loan. With an ISA, a student obtains private funding in exchange for agreeing to pay an affordable percentage of her monthly income for a set period after school. Unlike a loan, an ISA has no principal or interest—instead, an ISA bases a student’s payments on actual earnings instead of a fixed amount. Thus, students who struggle after school are always protected—and funders only recoup their money when students are successful.
There is a small group of companies and nonprofits attempting to offer ISAs in the U.S. but many have struggled to grow as a result of uncertainty over where these contracts fall in current legal and regulatory frameworks.
The Benefits of an ISA:Unlike a loan, an ISA guarantees a student affordable payments over the payment term—regardless of whether the student’s payments ultimately repay the original amount.
Rather than students taking on debt and shouldering an enormous amount of financial risk on their own,
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Guaranteeing ISAs Help Students Get Ahead
Most importantly, the Investing in Student Access Act of 2015 includes robust consumer protections that would be implemented by the Consumer Financial Protection Bureau:
1) individuals making less than $15,000 per-year (adjusted for inflation) are exempt from making payments;
2) students cannot agree to payments higher than 15 percent of income for shorter-term contracts (15 years or less), with the cap decreasing to 7.5 percent for the longest contracts allowed (30 years);
3) funders must disclose to students how their monthly payments would compare under the ISA (at various hypothetical afterschool income levels) to payments on a loan for the same amount of money and the same length of time; and,
4) a minimum standard to prevent unfair contracts—ones where the ISA provider is not appropriately sharing risk with the student.
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