They Aren't the Bogeyman

Paying for school can be a huge hassle, especially when the bank bans you from showing up with a dump truck full of pennies. Do they know how hard it is to borrow a dump truck on short notice?

Anyway, if you've been doing your homework on college finance, you might have come across this delightful little phrase: income share agreement. Street name: ISA. We're here to give you the lowdown on this unorthodox, yet increasingly popular, student loan alternative. Don't worry, you can thank us later.

Our first pro tip is simply this: don't believe all the hype. ISAs aren't all good or all bad. You knew that already though, right? You're one of those Shmoop-born-and-bred critical thinkers.

They Are Basically Selling Personal Stock

The ISA was the brainchild of Milton Friedman, who proposed a method of selling personal stock.

To be brief, ISA = being paid money upfront for offering a share of your future earnings to investors (source).

In most cases, the money for an ISA will go toward a student's education. But if we'd known about this concept earlier, we would have charged our entire childhood against our earning potential.

Repayments Vary Significantly, Unlike Student Loans

You can enter into an ISA with the government or with a private institution. You're paid a fixed amount, but what you repay is contingent on how much you earn afterward (source). 

The main difference between an ISA and a traditional loan is that loan repayment amounts are paid back in fixed sums, while ISA repayments can vary significantly.

Pretty simple stuff...unlike holiday gift wrapping. We still get nightmares from the ribbon fiasco of 2008.

If You Earn Less, You Pay Less

An ISA is like a kind of insurance against poor return on your educational investment. If you end up earning less, then your education will have cost you less (source) because the amount you repay will also be smaller. Excellent.

Bonus: if you manage to cover all of your educational expenses through ISAs, then you won't have to deal with student loans at all. We especially recommend that you steer clear of private student loans, which have notoriously steep interest rates. In fact, you might want to practice affecting sympathy for when your friends tell you their Sallie Mae horror stories.

Trust us, they're not pretty.

They're Gaining Popularity

Right now, ISAs are mostly used to fund students' attendance to trade schools and non-profits (source). However, as the student loan debt crisis escalates to Godzilla-like proportions, ISAs are gaining traction. 

Some young people attending traditional, four-year universities are now turning to ISAs as a viable alternative to student loans.

ISAs can also be useful for non-students looking to collect investors (source). Now you know where to turn when you're finally ready to launch that pancake house-come-nightclub. Such a good idea.

You Have Options for Lendors

Wait, you mean money doesn't just fall out of the sky once you decide to go to college? Unfortunately not, our optimistic friend.

Web-based funding companies like Pave, Upstart, and Lumni (source) connect students with potential investors. Looking into these options might save you some cash.

States are even getting in on the action these days. Oregon's "Pay It Forward" legislation allows students to attend college "for free"...while agreeing to pay a portion of their future income back to the state after they start work (source).

With all of these options at your fingertips, we won't blame you if you start to feel like the most popular kid in school.

Repayment Time Averages 10 Years

You know when you bump into your crush in public and you haven't showered or changed out of sweatpants in days? We know that feeling. Repaying your debt can be just like that.

Luckily, knowing the facts can help alleviate some of the awkwardness. The average repayment period for private ISAs is about ten years. During that time, you'll be expected to fork over about 3% of your income (source). Or, you can opt to bite the bullet and shell out 6% over a five-year period (source).

That's a significant chunk of your income, no doubt. But the average person takes twenty years to repay student loans, so you should at least consider all of your options (source). After all, who wants to be repaying loans until they're a hundred years old? Not us.

Institutions Offering ISAs Target Students Who Will Succeed

It's not all gumdrops and candy-filled trees, though. (Sidebar: wouldn't that be kind of awesome?) ISAs are still an investment platform. They are intended to recoup whatever money is spent on a student.

This means they might not be available to students majoring in fields that traditionally provide low return on investments (source). Similarly, ISA companies assess the future earning potential of students and specifically target those who might earn a higher income after graduation (source). 

Sure, that seems a little exploitative, but don't take it personally, Shmoopers. It's just business.

They Are Not A One-Size-Fits-All Solution

An ISA is just one tool in your college finance arsenal. However you decide to fund your education, we do suggest that you try to avoid paying off your college education 'til you die. 

There are plenty of creative ways to reduce the sticker price of school...and we happen to know about some of them. No need to thank us. What are friends for?