ISAs are still in their infancy. The newness of ISAs requires me to first discuss income share agreements generally and how income share agreements compare to student loans. After that, I can review the specifics of Stride Funding.

Borrowers already familiar with ISAs can use the table of contents below to jump into the Stride specific review.

What is an Income Share Agreement?

An income share agreement is a financial product that students can use to pay for college.

The ISA is an actual contract between a lender and the borrower. Borrowers agree to pay the lender a portion of their income for a specific period of time.

The big advantage of an ISA is protection for the borrower if college doesn’t work out. If you go to school and can’t find a job, you won’t have ISA bills coming in. Similarly, an ISA protects underemployed borrowers. If you are not earning much money, an income share agreement will cost the borrower very little.

The potential downside comes if things go well after school. Borrowers with higher incomes could end up paying back much more than what they borrowed. ISAs usually provide a cap on borrower spending, but the maximum repayment can be relatively high.

Income Share Agreement Pros and Cons: Income share agreements make look and sound like student loans, but they are very different. Take a close look at all the pros and cons of an income share agreement before making any major decisions.

Getting Income Share Agreements vs. Student Loans

ISAs and student loans look very similar.

They are both tools to pay for school and have terms set by an agreement between a lender and a borrower.

Qualifying for an ISA works differently than a student loan.

• ISAs don’t really care about your credit score. Any credit check is usually done to discover major issues.
• ISAs are far more concerned with the school you attend and your area of study.

Additionally, ISA lenders are also far more concerned with your progress in school. If you are in your final year of studies, you will have a better shot at qualifying for an ISA than you would if you were in your first year.

Bottom line, the better your career prospects appear to be, the better your odds of getting an ISA.

Deciding Between an Income Share Agreement and a Student Loan

Most borrowers eligible for an ISA can also get a student loan.

Choosing between these options can be difficult. While student loan costs are fairly predictable, ISAs could cost nothing or be very expensive.

In my opinion, students should first max out federal student loan options before opting for an ISA. This is because federal loans may offer the best of both worlds. Borrowers who do well financially after school can repay the debt plus interest and be done. Borrowers who struggle have federal protections like income-driven repayment (DR) and student loan forgiveness. A federal loan on an IDR plan will function similarly to an ISA.

Things get interesting when comparing a private student loan to an income share agreement.

One way to compare options would be to project how much the ISA might cost if you are an average student with an average income at graduation.

Comparing Stride vs. Private Student Loans

The basic terms with Stride look much different than a traditional student loan:

To review Stride Funding, I looked up actual income share offerings on the Stride website. I found that a third-year English major at Ohio State University would not get help from Stride. However, a fourth-year mechanical engineering student would qualify for help. Specifically, Stride would provide $10,000 of funding for school in exchange for a 4.7% income share.

Here are the terms Stride offered:

The Stride application makes it fairly easy to compare a Stride Loan to a traditional private loan.

In my example, a Stride income share and a private loan nearly break even under the following circumstances:

Graduates who earn less money or can only find private loans with double-digit interest rates will be more likely to benefit from an income share. If you can find a loan with a lower interest rate, or expect to earn more money, then a private loan might be the better option.

There are many other variables besides projected earnings and available private loan interest rates. How confident are you in your earning potential? What would you do if you couldn’t find a job? Are you more worried about the risk of not finding a job or the risk of spending more than necessary?

Reviewing the Fine Print on Stride Funding Income Share Agreements

I reached out to Stride to dig down into some of the details of the income share agreement.

I learned the following:

• Borrowers earning below the minimum income do not have to make any payments.
• Three milestones can end the income sharing requirement:
  • The borrower makes 60 total payments (5 years worth),
  • Ten years pass since the end of the grace period, or
  • The borrower pays double the original amount borrowed.
• Determining the income to be shared can be tricky.
  • Stride will use pay stubs or employment contracts to determine income.
  • At the end of the year, Stride compares the borrower’s income against their tax return to make sure the borrower didn’t overpay or underpay for the previous year.
  • This approach might be complicated for people with variable incomes like hourly, seasonal, or self-employed workers, but the end of year tax verification should correct overpayment or underpayment.
• Borrowers can sign away a maximum of 15% of their future income with Stride.

Due to the relative newness of ISAs, borrowers with questions should reach out to companies like Stride before signing any agreements.

Is it a Good Idea to get an Income Share Agreement with Stride Funding?

I’m genuinely torn on this issue.

For starters, I think whether or not Stride or any other ISA is a good idea will depend upon where you are in school.

Graduate Students – Grad students probably won’t benefit from an ISA due to high federal student loan borrowing limits. Unlike undergrad, where federal loans are limited, graduate students usually qualify for all the federal aid they need.

Undergrad Students – Stride is worth considering as an alternative to private loans. It could end up costing more, but an ISA offers excellent protection if the investment in college doesn’t pay off as planned.

I think Stride is best for students approaching graduation who are concerned that their private debt balances are too large. Opting for an ISA can help ensure that the private loan payments stay manageable.

Stride could also be an option for borrowers who have plenty of scholarships, grants, and federal loans but need a bit of extra cash to pay for school. Borrowing through Stride could help these borrowers avoid private student loans completely.

Finally, Stride is a great choice for borrowers who are short on funds and cannot find a cosigner. No cosigner lending is where Stride excels.

Click here to investigate Stride Funding ISA options.

The post Stride Funding Income Share Agreement (ISA) Review appeared first on The Student Loan Sherpa.

In theory, it sounds like a good idea. Rather than paying huge sums of money towards a dreaded student loan, students who used ISAs are only required to pay what they can afford. Borrowers pay a percentage of their income, and those with lower earnings may not have to pay at all. It gives schools an added incentive to help grads find jobs and protects the students who don’t benefit from college.

Unfortunately, ISAs would function more as a temporary band-aid than an actual cure to the student loan crisis.

ISAs Don’t Fix the High Cost of College

The student loan crisis has reached crisis status because attending college has become unreasonably expensive.

Like many other purported solutions, Income Share Agreements wouldn’t move the needle on college prices. Instead, an ISA would become a new form of student debt.

Rather than making college more affordable, an ISA would present the exorbitant cost in a more palatable manner. Paying a small percentage of future income may seem far more reasonable than borrowing $40,000 per year for tuition.

For ISAs to Work, They Must be Profitable

The income share business won’t be sustainable unless the lenders are making money.

If ISAs don’t generate profits in the long run, funding will dry up.

From the perspective of the student population, this means that as a collective group, students will still be paying the full price of college plus interest.

While ISAs would arguably protect students from the horrors of massive student debt with little to no income, they would still function similarly to student loans: Colleges get paid large sums of money upfront. Lenders, whether student loan companies or ISA companies, get their capital back plus interest. Graduates will still spend decades repaying the debt.

ISAs would also carry many of the same flaws as student loans…

Income Share Agreements: Just Another Form of Student Debt

Those following the student loan crisis know that one of the major problems is that 18-year-old students rarely understand the consequences of their borrowing decisions. Many parents poorly grasp the impact of student loans.

Income Share Agreements risk similar confusion. Pay-what-you-can-afford sounds nice in theory, but it leaves many questions unanswered. What is considered income for the purposes of the ISA? What if the student doesn’t finish school or get a job in their field? Do cost of living expenses, family size, or health issues impact ISA payments?

Like student loans, ISAs are complicated financial documents. Like student loans, they may increase access to college. But, like student loans, they will help mask the true cost of a college education.

Students viewing the cost of college through the rose-colored glasses of an ISA is potentially dangerous. Having yet another student debt vehicle will empower schools to continue to inflate the cost of college without fear of the well of student funds running dry.

Whether the debt is called a student loan or an Income Share Agreement, borrowers still face the possibility of decades of life-altering bills.

An Income Share Agreement of Sorts Already Exists with Federal Student Loans

If the big selling point of an ISA is the protection for graduates who don’t earn money, such a product already exists.

Federal student loans all have income-driven repayment plans available. Borrowers earning beneath 150% of the poverty level can qualify for $0 per month payments, and after 20 or 25 years, the borrower is relieved of their obligation to pay.

By utilizing federal student loans, borrowers can arguably get the best aspects of an ISA and the best aspects of a student loan in one product.

A Real Solution

To fix the student loan crisis, college has to become more affordable.

Because college is so expensive, public and private efforts have been made to provide access to the necessary funds. As a result, it is relatively easy to get student loans. With easy access to funding, colleges can continue to raise prices. Until this back-and-forth is slowed or stopped, college will continue to be expensive, and the student loan crisis will linger.

ISAs may offer an interesting alternative to student loans, but the marginal benefits may only serve to prolong an already vicious cycle of student debt.

The post Income Share Agreements Won’t Fix the Student Loan Crisis appeared first on The Student Loan Sherpa.

The idea is more common in other countries but quickly gaining traction in the United States.

Rather than borrowing a traditional student loan, income-share students agree to pay a portion of their income for a set period of time. The goal behind this approach is to protect graduates who struggle to find jobs and to incentivize schools and lenders to help students find quality employment.

Ideally, an income-share agreement aligns the interests of the borrowers with the schools and lenders. The more money the borrower earns after graduation, the more money the lender gets paid.

That being said, not all income-share agreements are created equal. Some will be excellent deals for borrowers while others end up being worse than traditional student loans.

Ultimately, the quality of an income-share agreement will depend upon the terms of the contract. Because borrowers are literally signing away future income, it is critical to read and understand the agreement in full.

Borrowers should pay special attention to the following terms.

Payment Length and Timeframe

All income-share agreements will require participants to pay a certain percentage of their income, for a certain period of time.

That time period may only be a couple of years or it could last much longer. The length of the contract will make a huge difference in the total cost.

Income-share borrowers should run through the numbers in a few different ways. First, look at how much would have to be paid if the student ends up earning an average salary. Run the numbers again for best-case scenarios and worst-case scenarios to get an idea of the range of possible costs.

Additionally, it is important to look at the repayment timeframe. For some agreements, it will start immediately after completing school. Others will not start the clock until the borrower starts earning an income. For example, the income-sharing may only last two years, but that two-year window might start four years after finishing school.

What Income is Going to be Shared?

One of the more critical numbers to look at is the percentage of income being shared. Unfortunately, it isn’t as simple as just saying 10% of income.

Is that income before tax or after tax?

How are bonuses or overtime handled?

Is the income based on adjusted gross income on taxes?

Who is responsible for determining income? How does the process work?

Does marriage have any consequences? What happens if the income-share spouse stays home with the kids?

All of these questions should make one point very clear: income determination can get complicated very quickly. Income-share participants should understand exactly how the calculations are made before signing any agreement.

Is there an Income Floor?

Most income share agreements contain an income floor. This is the part of the income where borrowers keep 100%.

As an example, one income-share agreement calls for borrowers to pay 17% of their income above $50,000. If a borrower earns $40,000 per year, they won’t have to make any income-share payments. If they make $60,000, they will only have to pay 17% of $10,000.

Other income share agreements may not have a floor at all.

In some circumstances, a higher percentage payment with a high floor may be preferable to an income-share that requires payment starting with the first dollar earned.

Payment Maximums or Caps

A critical term for all borrowers will be the cap on total payments.

The cap is the maximum that a borrower will ever have to pay on an income-share agreement.

Without a cap in place, a borrower could end up paying a fortune for a small amount borrowed.

What if the student doesn’t find a job in their field of study?

One area where income-share agreements are becoming popular is coding academies.

Students attend these coding academies with the idea of becoming a computer programmer or working in a related field.

Suppose the student finishes school and is unable to find a job using their degree. Needing an income, the unemployed graduate takes a job in a completely unrelated field.

Does that graduate still have to make payments on the income-share agreement?

Starting a Business

Starting a business is notoriously difficult.

Many small business owners do not turn a profit for years.

An income-share agreement could be a great deal for someone who aspires to start a business because the income-sharing may only apply to the early years where the business isn’t generating much of a profit.

However, the lender in the income-share may want to protect themselves and create a term in the agreement that either extends the income-share for small business owners or gives the lender ownership of a portion o the business.

Here again, things can get complicated very quickly. This is yet another example of why it is critical to read the income share prior to signing.

Cost of Tuition vs. Value of Degree

Some programs may say that students can either pay $25,000 for classes or sign an income-share agreement.

When prospective students do their analysis, they may compare expected income-share spending against the $25,000 they either pay or borrow in a traditional student loan.

Unfortunately, the analysis cannot stop here.

How much is the program really worth? If the classes are all online, the school may only be spending $500 per student.

For this reason, traditional school evaluation is still important even if there is an income-share agreement. Students considering the program should ask questions like:

• What percentage of graduates get jobs in the field?
• What is the average salary?
• How many employees work full-time helping students find jobs?
• What percentage of students find jobs through the career development office?

The important takeaway is that an income-share agreement doesn’t automatically mean the school will do a good job helping graduates find jobs. Schools may choose to maximize income by focusing on student recruiting pumping out as many graduates as possible. Even if half the students don’t get good jobs, they will make a fortune on the half that finds jobs on their own.

Income-Share Requirements

Anyone considering an income-share agreement will have some serious homework to do.

Not only will they have to do the traditional school analysis that all prospective students must do, but they will also have to carefully read and consider the terms and conditions of the income-share agreement. There are major pros and cons to consider.

In some cases, the income-share agreement could be a great deal. In others, it might be worse than a typical student loan.

The post Terms to Look for in Income Share Agreements appeared first on The Student Loan Sherpa.

As someone who spends his time helping borrowers navigate student loan headaches and stand up to lenders, finding a better way to pay for college is a passion. However, I’m not ready to jump on the income share agreement bandwagon yet.

Income Share Basics

The concept of an income share agreement is pretty simple. Instead of borrowing money to pay for school, the student agrees that he or she will pay a percentage of their future income.

The big advantage of an income share agreement is that the student never has to worry about keeping up with huge student loan payments. If college doesn’t lead to a great income, the cost will be low.

I’ve long argued that there is a real risk to student loan borrowing, and an income share agreement greatly reduces this risk. If I were about to start my student debt adventure from the beginning, I’d be foolish not to consider an income share agreement.

That all being said, income share agreements make me really nervous.

Lenders Excel at Making Money

Anyone with student debt has seen the many ways lenders make a buck on student debt.

Interest is charged on a daily basis. Late fees add up quickly if you fall behind or make an accounting error. They lobby for laws that protect lenders and their investors. Minimum payments are often set at levels so low that borrowers pay mostly interest with very little actually reducing the principal balance.

If these same companies get into the income share agreement business, it wouldn’t be because suddenly turned charitable.

For-profit companies exist to turn a profit. If they are providing students money for college, it is because they expect to turn a profit on the endeavor.

Some students might get the better end of the deal. Those that don’t finish school or find good jobs may receive far more money than they ever repay.

In order for lenders to be ok with this loss, they will have to make up for it with gains elsewhere. That means many students will not only repay the money they received for school, they will also have to pay enough to cover the losses on other students, and they will have to pay enough to generate a profit for the lenders. Otherwise, the lenders wouldn’t be in the income share agreement business.

These agreements can also get complicated very quickly.

Are payments based upon the borrower’s salary or their take-home pay? What about graduates who start a business… do the income share agreements try to claim a portion of the value of the business? Are all expected to pay at the same rate or are accommodations made for family size or regional cost of living?

Depending upon the agreement, borrowers may get a cap on how much they are excepted to pay, but that doesn’t change the business model of an income share agreement.

A Better Income Share Agreement

Advocates of income share agreements might say that students should be willing to pay more if they make more. That is the point. Income share agreements take the risk out of borrowing for college.

Fortunately for students, a better income share agreement already exists in the form of federal loans.

Like income share agreements, federal loan borrowers can pay based upon what they make rather than what they owe. Unlike income share agreements, the most a student ever has to pay back is what they borrowed plus interest. There are massive premiums to be paid by the students who graduate and find great success.

In short, federal student loan borrowers are already getting many of the benefits of an income share agreement without having to deal with the major risks of an income share agreement.

The Real Problem

Income share agreements have appeal because many realize that the college funding model in the United States is broken.

We already have $1.5 trillion in student loans and it continues to balloon. Innovation is needed. Income share agreements seem like an innovation that could help.

The problem is that college costs have spiraled out of control.

In the past college was almost always an excellent investment. The cost was reasonable given the large expected return. Today, the price of college may not reflect its true value. Even though wages have stagnated relative to inflation, the cost of college has skyrocketed compared to inflation.

Most high school students are not yet sophisticated consumers and college is still a necessity for many Americans. The price of college continues to grow.

Income share agreements will not do anything to address this fundamental issue. They will still provide money to students to attend college. As long as the money is still available to pay for school, colleges can continue to raise the bill.

The Next Steps

Just because income share agreements are scary doesn’t mean that they should be dismissed or ignored completely.

Given the desperate college finance climate, more options can be a good thing. Students just need to be very careful with these agreements.

They can be a good deal… but the potential exists for them to be a huge mistake.

The post Income Share Agreements Scare This Student Loan Expert appeared first on The Student Loan Sherpa.

The way an income-share agreement works is relatively straightforward.

Suppose a student needs $5,000 to pay for school. Rather than borrowing a $5,000 student loan, the student enters into an income-share agreement. Per the agreement, the student agrees to pay a portion of their income to repay the debt.

This approach has some obvious benefits, but it comes with a few not-so-obvious drawbacks.

Income-Share Agreements in Action

Typically an income-share agreement lasts no more than ten years. Students usually get to keep their first $20,000 of income each year. After that first 20k, borrowers pay a set percentage of their income to the lender.

Additionally, payments under income share agreements are normally capped at 1.5 to 2.5 times the amount of the original amount borrowed for school.

Purdue University, one of the schools leading the income-share agreements trend, also dictates that students cannot sign away more than 15% of their future income per these agreements.

Presently, the market for income-share agreements is about $20 million a year. In the future, income-share agreements could be a billion-dollar industry.

Pros of Income-Share Agreements

The big advantage of an income-share agreement is that the debt will be affordable. Underpaid or unemployed graduates won’t have to deal with student loans they cannot afford.

Graduates on income-share agreements can behave as though they are in a slightly higher tax bracket. Instead of keeping 70% percent of their earnings as “take-home pay,” the percentage will be lower.

Qualifying for an income-share agreement works much differently than a traditional student loan. Credit checks eliminate borrowers with a severe negative history, but lenders don’t focus on credit scores. Additionally, there are no cosigners required. Income-share lenders care more about the school attended and the major of the borrower.

Another advantage of these agreements is the incentives created. If an investor or lender provides funds for school, and that student does not get a job, they are out of luck. If the lenders and investors can help that student find a job, they will make money. Instead of negative credit reporting and collection calls, we would have job placement assistance and career counseling.

Income-Share Agreement Cons

The problem with an income share agreement is that a student is betting against himself or herself. The investor or lender expects to make a profit on the deal. The student takes the deal because they are worried that they might not be able to pay back the amount in full.

If, at the time of the signing of an income-share agreement, a student knew for sure that they would be able to pay back the money, they would be much better off just getting a standard student loan. In many ways, an income-share agreement is a student’s way of protecting themselves against unemployment and underemployment.

From a big picture perspective, income-share agreements are unlikely to solve the student debt crisis. The student loan crisis can be blamed in part on the ever-increasing cost of college. If income-share agreements enter the equation, it just provides another means for students to afford increasingly unreasonable tuition prices. More borrowing means more debt, which means the crisis continues.

Finally, because income-share agreements are less common and more complicated than student loans, understanding the agreement’s exact terms becomes incredibly important.

Reading the Fine Print

Ultimately the quality of these agreements comes down to the exact terms and conditions. Just as some student loan terms are great, and some are awful, income-share agreement quality could vary greatly.

Students considering an income-share agreement should look very closely at the cap in payments. If the cap is too high or the length of the share is too long, it could result in very unfair terms to the student. Already, some are calling income-share agreements a modern-day form of indentured servitude.

Before signing an income-share agreement, it is critical to understand all of the terms and conditions.

Going Forward

Because we are talking about long-term financial agreements involving sophisticated parties such as lenders and investors, it will be critical that the interests of the students who enter these agreements are protected.

One of the big issues with student loans has been the lack of consumer protections in the marketplace. If income-sharing agreements are to be part of the solution to the student loan crisis, it would be wise for schools and regulators to set clear boundaries early on so that the industry has a chance to grow in a way that benefits all involved.

They may sound simple in theory, but the contract has the potential to get very complicated, very quickly. If done properly, it can be a great system. If abused, graduates could be unfairly forced to fork over a ton of money.

As a student borrower advocate, I find income-share agreements to be a bit scary, but they also have the potential to help many students.

The post Income-Share Agreements Pros and Cons appeared first on The Student Loan Sherpa.