Let’s play Two Truths and Lies. I’ll go first.
- I have two cats.
- I’m allergic to peppers.
- I graduated from college and received about 80,000 student loans.
If your answer was # 2, you are absolutely right! In fact, pepper is my favorite vegetable (or fruit?).
I am a self-proclaimed catwoman who sadly graduated from college with a bunch of student debt.
However, the latter was not because I was irresponsible and recklessly spending money on stupid things, but because I came from a low-income family. This meant that anything that was not covered by grants or scholarships had to be paid for by debt.
I’m still repayment of my loansand I had to postpone things like buying a house or having kids. So, I’m always wondering: is there a better way to pay for college tuition when scholarships and grants just aren’t enough?
Revenue sharing agreements are intriguing solution.
An Income Sharing Agreement (ISA) is a financial agreement whereby you receive a specified amount of money up front to pay for college tuition in exchange for a fixed percentage of your future income.…
Like student loans, money can be used to pay for tuition and other expenses such as room and board.
How does ISA work?
There are two ways to get ISA:
- Through your school.
- By contacting the ISA provider directly.
However, whichever route you choose, the application process will be the same. You will need to provide your basic contact information as well as the following:
- Your area of study.
- The type of degree you want to earn.
- Your GPA (in some cases).
- Expected graduation date.
- The amount you want to borrow.
- The date until which you will need funds.
After your application is approved, you will receive an email with the details of your ISA. Here you will find:
- The percentage of your income that you will have to pay.
- Various conditions available to you (for example, the duration of your repayment plan).
- The minimum income threshold from which you can start making payments.
Once you sign up on the dotted line, your funds will be sent to the school and disbursed to you. You are not required to make payments before after you finish your studies and start earning a certain amount.
Pros of getting ISA
- They do not charge interest. except Direct subsidized loansInterest on both federal and private student loans is charged immediately upon payment. ISAs have an advantage in this regard, as they do not generate any income while you are in school.
- Flexible credit requirements. One of the best things about ISA is that you don’t need a contributor to get funding approval. You also don’t need good credit to qualify, which is usually a requirement for private student loans.
- Short maturities. The maturity of student loans ranges from 10 to 20 years, depending on the loan. ISAs offer shorter maturities ranging from 5 to 10 years.
- They can be cheaper than Direct PLUS and private student loans. Direct loans PLUS (at the time of writing) have a fixed interest rate of 6.28%while private student loans may have interest rates approaching 12%… With ISA, you can pay only 2% of your income. Here’s a quick example: if you make 50k per year and have 2% ISA, your monthly payment would be approximately $ 83.
- They are closed. ISA has a payout limit. It depends on the program, but usually the repayment amount limited one and a half to two times more than you originally borrowed.
- Your monthly payment can be as little as $ 0. If you lose your job or have a low-paying job, your ISA payment could be as little as $ 0 – which you won’t get with a private student loan.
- You will be charged a fixed interest rate at the time of repayment. Once you sign your agreement, this percentage will be locked for life and may be between 2% and 17% your future income, depending on your consent.
Cons of getting ISA
- Payments are hard to predict. If you don’t have a crystal ball, it is impossible to know how much you will earn in the future. The only way to estimate the size of your payments is to use comparison tool… However, these estimates should also be viewed with a grain of salt, as the wage data they use may be inaccurate…
- Shorter grace periods. Both federal and private student loans do not require you to start making any payments within six months of graduation – the same cannot be said for all ISAs. For example, Lambda schoolISA have a monthly grace period and Financing a step gives students a three month grace period.
- Stricter than student loans. Student loans are available to almost any student, regardless of their major, as long as they study at least part-time and have a good academic record. But ISAs are often limited to junior and high school students, and in some cases, approval will also depend on your GPA.
- Limited funding. With Federal Direct PLUS and Private Student Loans, you can borrow an amount equal to the full school-confirmed attendance fee. On the other hand, ISAs are usually limited to no more than $ 25,000 per academic year, depending on the program.
- They are not widely available. There are currently fewer than 10 colleges in the US that offer ISA and only a handful of independent providers, including Stride Funding. Better future ahead, and Climbing creditswhich offers both traditional private loans and performance-based loans (also known as ISA).
- You could pay more. Remember when I said that you will always pay a fixed percentage of your income for the duration of the ISA? Well, this could be a double-edged sword. Why? Because if your income grows, so will your payments.
- They are less regulated. Justin Draeger, president of the National Association of Student Financial Aid Administrators (NASFAA), says that because ISA is a new concept in the college realm, they are not as tightly regulated as student loans. Thus, there is a lot of uncertainty when it comes to how ISA companies can handle late or missed payments and how bankruptcy courts deal with these agreements.
- Refinancing may not be an option. Federal student loans can be consolidated into a single loan with a one-time monthly payment. Private student loans can be either consolidated or refinanced… However, there is not much information on whether the ISA can be refinanced, so be aware of this.
- You are not eligible for forgiveness. With federal student loans, you can apply for student loan forgiveness after making 120 consecutive payments if you work for an eligible government agency or non-profit organization. This not option if you have ISA.
ISA or student loans, which should you choose?
Borrowing money to study is a very personal decision that can have long-term consequences.
This is why NASFAA’s Draeger recommends exhausting your federal aid options (direct subsidized and direct unsubsidized loans) in the first place. “Primarily because of all the protections built into federal student loan programs.”
You should choose ISA if …
You have exhausted your direct subsidized and direct unsubsidized federal student loan options to the maximum.
Unlike direct subsidized and unsubsidized loans that offer income oriented repayment plansFederal Loans PLUS does not offer the same option as Private Student Loans. In addition, both PLUS and Private Loans can have a higher interest rate compared to ISA, and also earn interest while you are in school.
More details: 5 things you need to know before embarking on an income-focused student loan repayment plan
You don’t have a long credit history
Both private student loans and federal PLUS loans are approved on a credit basis, while ISA is not.
You have no accomplice
If you do not have a stable income or good credit history, it will be difficult for you to get approval for a private student loan without a co-author. So, if you do not have anyone to co-own the loan with you, then ISA may be the best option as they are not approved on the basis of the loan, but only your future income.
To learn more about job seekers, read our full article.
Your parents or potential partners have an unfavorable credit history
Both federal PLUS loans and private student loans may be refused if your co-author has an unfavorable credit history. In this case, you are better off applying for the ISA yourself.
Choose PLUS Student Loans or Private Student Loans if …
You have exhausted your direct subsidized and unsubsidized loans as much as possible, but you still need a significant loan.
ISAs typically have a borrowing limit of $ 25,000 or less, depending on the company, for one academic year. PLUS and private student loans are available for full tuition fees.
You have good or excellent credit
If you work full-time or part-time and have a credit rating of 700+, then student loans may be a good option for you as you will be able to provide a low interest rate on the amount borrowed.
More details: What is an excellent credit score?
Your parents can afford to take debt for you.
If both of your parents don’t mind taking out loans in their own name or re-arranging them for you, then Private or Parent Loans PLUS may be the best option. Unlike ISA, you will be able to predict your monthly payments from the beginning, which will depend on how much you earn, and also provide a low interest rate if your parents have great credit.
However, regardless of whether you choose student loans or ISA, the most important thing is that you understand the terms, in addition to realizing your potential. return on investment when applying to make sure your debt is available.
Before you sign on the dotted line
Do your research
There were several complaints sued certain ISA companies for misrepresenting their products and participating in others misleading practiceso be sure to check the company’s track record before signing. You can verify this by visiting the Consumer Financial Protection Bureau. Consumer Complaints Database or by looking at the company name on Best Business Bureau…
Read everything carefully
To pay close attention to the terms of your contract. If something seems funny, ask your ISA provider for clarification or talk to your school’s financial aid advisor.
Compare programs if possible
As I said earlier, ISA can be obtained through your school or from an independent provider. If you choose the latter, check a few companies first to pick the best deal available to you.
Summary
Revenue-sharing agreements can be a good option for bridging the financial gap when scholarships, grants, and other forms of federal student assistance are not enough to cover college tuition costs.
They are a particularly lucrative alternative to private student loans as they offer several safeguards against lost income and low incomes that private lenders currently do not have.