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Income Sharing Agreements vs. Student Loans

This article is slated to be updated with the latest FAFSA, Scholarship, and Financial Information. For more updated information, please refer to our 2023 and 2024 articles.

The relentless rise in college costs has turned the dream of higher education into a daunting financial burden for many students and their families.

But, what if we treated students as investments instead of debtors?

As traditional student loans leave borrowers shackled with mounting debt, an innovative solution is emerging: Income-Sharing Agreements (ISAs). Picture a world where instead of accruing interest on loans, you invest in your own future earnings.

This is a reality that Purdue University is exploring, and it could pave the way for a much-needed alternative in financing college education across the nation. Let’s take a deeper look.

What is an Income Share Agreement (ISA)?

At its core, an Income Sharing Agreements (ISA) is a contract between a student and an investor, where the investor covers a portion or all of the student’s college costs upfront. After graduation, the student agrees to pay back a predetermined percentage of their income for a fixed number of years, rather than a fixed loan amount. The more funding a student receives, the higher the percentage or duration of income sharing. Unlike traditional student loans, ISAs are contingent on the student’s future earnings, providing a built-in safety net. If the graduate’s income falls below a certain threshold, they don’t have to make any payments until their financial situation improves.

« Learn more about student loans

The Origins of ISAs and Their Potential Impact

The concept dates back to the 1950s and was the brainchild of economist Milton Friedman. While ISAs have been in use in Latin America for some time, they are relatively new to the United States. Purdue University’s “Back a Boiler” program is one of the pioneering efforts in the country, offering ISAs to juniors and seniors as a way to finance the latter part of their college journey.

While the program is still in its research phase, the potential impact of ISAs on the higher education landscape is significant. By shifting the financial risk from the student to the investor, ISAs could alleviate the burden of crippling student loan debt, which has become a national crisis. Students would no longer have to worry about making fixed monthly payments or accruing interest, regardless of their employment status or income level after graduation.

Making the Most of ISAs: Navigating the Opportunities and Challenges

When is an Income Share Agreement a Good Idea?

Income Sharing Agreements can be a game-changer for students who face financial barriers to accessing higher education. By aligning the interests of investors and students, ISAs incentivize both parties to ensure the student’s success. Investors benefit from the student’s future earnings, while students gain access to funds that would otherwise be out of reach.

For students pursuing careers with high earning potential, such as in finance, technology, or entrepreneurship, ISAs can be a strategic way to fund their education without the burden of traditional student loans. By sharing a percentage of their future income, they can avoid the pitfalls of fixed loan repayments and interest rates, potentially saving thousands of dollars in the long run.

Addressing the Potential Challenges of ISAs

However, ISAs are not without their challenges and limitations. One concern is the potential for adverse selection, where investors may be more inclined to fund students in high-paying fields, leaving those pursuing careers in education, social work, or other lower-paying sectors at a disadvantage. The basic concept of the agreements bears an uncomfortable similarity to indentured servitude, after all.

That said, while the visage may be reminiscent of the distasteful system, the major difference is that in practice, it is the student who comes out ahead, while the university incurs nearly all the risk. If anything, the current loan/debt system students are often forced to deal with now is closer to a form of indentured servitude, as, in most instances, the burden lands squarely on the debtor.

Additionally, there is a risk that some students may end up paying back more than they would have with a traditional loan, particularly if they go on to have exceptionally high-earning careers. To mitigate this, many ISA programs include payment caps, ensuring that the total repayment amount never exceeds a certain multiple of the initial funding received. 

The Bottom Line: Embracing a Brighter Future

While Income Sharing Agreements in higher education are not a panacea for the student debt crisis, they represent a promising and innovative approach to college financing. By aligning the interests of students and investors, ISAs have the potential to make higher education more accessible, reduce the burden of student loan debt, and empower graduates to pursue their passions without the weight of fixed loan repayments.

As Purdue University and other institutions continue to explore and refine ISA programs, it is crucial to address potential challenges and ensure that these agreements benefit all students, regardless of their chosen field of study or socioeconomic background. With open minds and a commitment to equity and accessibility, ISAs could be a game-changer in reshaping the landscape of higher education financing.

If you would like to explore other college funding options and strategies, our Financial Team at My College Planning Team offers complimentary consultations. Click here to schedule a free one-hour meeting and take the first step towards a brighter future.

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