According to a decision made by a federal regulatory body, income share agreements, sometimes known as ISAs, are considered student loans. But, ISAs are only a viable option to many other kinds of student loans if, in the long run, they will cost you less money.
Based on the conditions of a loan, it is simple to compute the standard student loan installments. ISA payments, however, are based on your income after you graduate from college. It is difficult to compare an ISA to a student loan since you cannot know the exact value of an ISA.
How Much You May Pay With an ISA
We looked at income—$38,000—to determine how much different earners would pay on ISA with a value of $20,000 throughout a 10-year payback period. Here are some rough approximations of low, moderate, and high income. We selected three income share percentages—3%, 5%, and 10%—and projected that each income would rise by 4% yearly. The following is a comparison between the two:
- Starting salary: $38,000
- ISA 3% of income: $13,687
- ISA 5% of income: $22,812
- ISA 10% of income: $45,623
If you have a higher income or higher percentage terms on your ISA, you may end up repaying more than the amount you got from the ISA. Nevertheless, this is not always the case. Consider the following scenario: you get a $20,000 ISA and agree to make payments equal to 10% of your income for the next ten years. But, there is often a restriction on the amount you may return; do not subscribe to an ISA with no payment ceiling. If you generate an annual income of around $75,000, you could pay back roughly $90,000.
With a 5% or 10% income share, even if you made roughly $52,000 per year, you would still have to repay more than the amount you were financed for. The only circumstance in which you would pay less than the initial $20,000 would be if you had a tiny income share (three percent) and a relatively low income (13,687 dollars for someone earning $38,000 and 18,730 dollars for someone earning $52,000).
How an ISA Fares Vs. Student Loans
ISAs should not replace undergraduate federal loans; they should be supplemented. Our results from the ISA were compared to those from two popular extra forms of student loans, namely private loans and government PLUS loans.
We began by examining a PLUS loan of $20,000 with an annual percentage rate (APR) of 7% and a repayment term of 10 years. After that, we looked at getting a $20,000 private loan with an annual percentage rate of 9% and the same payback term.
As refinancing student loans may lower overall debt, we were also interested in comparing ISAs to this option. We calculated how much more money a borrower would have to pay when they refinanced a $20,000 private loan with an APR of 5% and a new conventional 10-year term after making payments on the original loan for two years. Here is how much each one would set you back:
- Parent PLUS loan: $27,866
- Private loan: $30,402
- Refinanced private loan: $28,091
If you expect a high income in the future, an ISA may be a more cost-effective alternative than a PLUS loan, a private loan, or a loan that has been refinanced, provided that you are only required to repay 3% of your income. If you anticipate having an annual income of around $38,000, ISAs are also more cost-effective; however, this is only the case if the repayment terms are set at 3% or 5% of future income. On the other hand, if you anticipate making less money, it will be more difficult for you to qualify for these advantageous, low-percentage ISA conditions.
How to Estimate Your ISA Costs
There is no foolproof method of determining whether an ISA or a student loan will cost you less in the long run unless you have access to a time machine. Stay with the loan if security is important, but investigate refinancing options as quickly as possible to save costs. If you are unsure as to whether or not an income share agreement is appropriate for you, the following steps might help you determine your post-graduation wage to determine how much you would be expected to pay in total:
Have a look at the results produced by your school. The College Scorecard published by the Department of Education provides statistics on salaries for various programs offered by educational institutions. For instance, the typical annual wage for students majoring in film/video and photographic arts at the University of Utah is $23,000. Nonetheless, alumni of that school's computer science program earn a median income of $73,000 after graduation.
