What’s the situation with student debts in the United States like right now?
It's no secret that getting a good education costs money. But what are students, who really want to go to university, but cannot afford to pay the fees supposed to do?
Many people, who cannot afford to pay for their education outright, decide to get a student loan. It’s a very popular option that has been around for years. But what happens once these students graduate?
After graduating some students are lucky to find work straight away. However, there are many other graduates who do not find a job immediately, or they get a job that brings in a low monthly income.
These individuals end up facing real financial problems because they still need to repay their student loans.
As of 2021, American students owe a total of $1.7 trillion – a huge amount of money - in student loans. The Senate and the President Biden administration are considering the possibility of writing off part of the debts to student-borrowers, which will eliminate student debt for most of those with middle and low income.
But for now nothing has been agreed on, therefore, it's essential for students to start thinking about getting financial support through other means.
Could an Income Sharing Agreement be the solution to students’ financial problems?
Let’s learn more about the ISA system.
What is an ISA?
So, an Income Sharing Agreement (or ISA) is a payment scheme that can be used by a university or any other educational organization.
The university/school pays for a student’s education, but in exchange the student agrees to pay a percentage of their monthly income to the university/school in return. This agreement is set over a specific period of time.
We should clarify that an ISA can fund both a college education and a special course, or a series of special courses.
Here are the basic terms used in a typical ISA contract:
- Payback period. This is the amount of time you will be paying a percentage of your income to the university/school for. If you are paying for a full Bachelor's or Master's degree, the repayment period could be up to 10 years, and if you pay for a particular course this period could be shorter.
- Percentage of Income. This is a fixed portion of your monthly income (before taxes) that you will have to pay back during the agreed payback period.
- Monthly payment is the amount of money that you will pay on a monthly basis. This will be a percentage of your monthly income. The higher your income is, the larger your monthly payment will be.
- Minimum income threshold. Sometimes a contract says that you must earn above the minimum income threshold before you start paying back your ISA. That is, if you receive an income below the threshold value, or do not receive an income at all (lost your job for instance), you do not need to pay for your ISA during this period.
- Upper payment limit. This is intended to protect highly successful students from overpayments. That is, if your career is growing rapidly and you are earning more and more income, at some point the payments under the ISA contract may become huge. As soon as the cumulative payment reaches the upper payment limit, your contractual obligations are terminated, even if there is still a proportion of the payback period left.
You should carefully evaluate all of these points before signing a contract, and try to estimate in advance how much you can earn in your desired job to see if this is suitable for you. An ISA is not for everyone and in some cases, a student loan might be better.
An ISA vs a student loan
Let's look at an ISA versus a student loan.
- Protection against bankruptcy. This is the first, and perhaps the main advantage of an ISA. As we have already said, you won't have to pay an ISA back if your income is very low, or you don’t have any income at all. On the other hand, you’d still have to pay a student loan repayment every month, even if you didn't get a job immediately after graduating or you’d lost your job.
- If a college offers an ISA program (and not all of them do), this means that they are confident that their graduates will find good jobs after graduating. Which is a good sign for future students.
- When you sign up for a student loan you can immediately see all your obligations – how much and how long you will have to pay the loan for. But, if you’ve got an ISA it’s more difficult. Yes, you can estimate the average salary in your industry, but you can earn more or less (especially in the beginning), so, it is not possible to determine exactly how much money you will pay monthly, and this, of course, is a drawback. Why is that bad? Because you cannot accurately assess the feasibility of this decision. Perhaps if your income rises rapidly and the upper payment limit is very high, the total cost will be even higher than that with a regular loan. Nobody needs that.
- Another notable disadvantage of an ISA compared to a student loan is its weak government regulation. This ISA financing instrument is quite new, and it's not as familiar to people as a student loan. The terms and contracts will be very new to most people, and in most cases, contracts differ from one school to another. Which means that when you choose between two colleges you have to read and calculate everything in each particular case, and this can be quite complicated. It also makes the decision making process quite slow too.
So, what do you choose?
To answer this question correctly, you’d need to conduct a detailed and thorough analysis of the ISA model at the school you would like to attend. You would need to look at salaries for the role you want in your area, and then compare this with student loan offers.
Everyone has a different situation, so you must do what suits you.
However, if you are considering vocational training that is not in a college, but through a specialized course, you are almost always guaranteed to receive relevant knowledge and skills that will allow you to immediately apply and get a great job after graduating. Often these skilled jobs come with a good salary, so you could estimate how long your payback period would be and how much you would be paying back via an ISA.
Do not over-rely on the government to solve your financial problems. It is much better to take matters into your own hands.
Indeed, the ISA is a new and rather interesting option, but in order for everything to go as it should, and so that you don’t face difficulties in the future, you should keep these two simple rules in mind when checking out an ISA:
- Read the contract and try to assess your obligations under different scenarios. The more accurately you do this, the better your decision will be in the end.
- Choose a school and an ISA that will enable you to learn skills to get a job immediately, or as soon as possible. If you spend years studying only to find out that you can't get a job as quickly as you’d like, then the ISA will be of little use to you.
We hope that the Income Share Agreement is the right tool to help you achieve professional success. Good luck to you!