ISAs Demystified: 9 Facts about Income Share Agreements

1. 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.

2. 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.

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.

3. 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.

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.

4. 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 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.

5. 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. Now you know where to turn when you're finally ready to launch that pancake house-come-nightclub. Such a good idea.

6. 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 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.

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.

7. 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. Or, you can opt to bite the bullet and shell out 6% over a five-year period.

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. After all, who wants to be repaying loans until they're a hundred years old? Not us.

8. 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. Similarly, ISA companies assess the future earning potential of students and specifically target those who might earn a higher income after graduation.

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

 9. 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?

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Axelle Lagaillarde, Student Outreach Associate ALFC

Axelle’s previous experience is as an Enrolment Associate, assisting students with admissions-related queries and assisting her team with building systems and processes. Prior to ALU, she worked with IBM in the United Kingdom and at Solvay in Portugal. Axelle holds a BBA with Honours in Business Administration from the University of Kent, United Kingdom.

Christiane Koenig, Director of Student Outreach ALFC

Christiane has two years of experience with recruiting students from across Africa and North America for ALU. Christiane has also worked as a Corporate Relations Executive at Diageo's brewery in Ghana, at Wells Fargo Advantage Funds in Boston and co-founded Zished, a Ghanaian e-commerce company. Christiane holds an undergraduate degree in Economics from Mount Holyoke College in Massachusetts and is currently pursuing her MBA at the ALU School of Business.

Jonathan Nip, Director of Operations ALFC

Jonathan serves as Director of Operations for the African Leadership Finance Company. Prior to joining ALU, Jonathan was an analyst in Deutsche Bank’s Corporate finance team in Amsterdam where he worked on multiple major deals within M&A, ECM and LDCM. Jonathan is a Dutch citizen and holds a Master’s degree in Physics from the University of Amsterdam and Berkeley Lab.

Dana J. Hyde, interim CEO ALFC

Dana served as the Chief Executive Officer of the Millennium Challenge Corporation (MCC), where she oversaw a portfolio of over $4 billion in global economic assistance programs aimed at reducing poverty and spurring growth. Prior to MCC she served as Associate Director at the White House Office of Management and Budget (OMB) and as a Senior Advisor to the Deputy Secretary of State. A lawyer by training, Dana has also worked at the U.S. Justice Department. She graduated with honors from Georgetown Law School and holds a B.A. in Political Science from the University of California Los Angeles.

Craig Lyons

Investment banker with 25 years of experience in starting and building a number of African based companies. Sits on a number of Boards as a director providing independent analysis, leadership and managerial skills, injection of creative energy, financial acumen, strategic guidance and access to a broad network of relationships.

Peter Mombaur

Co-Founder and CEO of Terra Education. Former engagement manager for McKinsey with wealth of experience in private equity.

Tonio DeSorrento

Chief Executive Officer at Vemo Education. Vemo is the leading ISA company in the United States and partners directly with educational institutions to design, implement, and service ISAs.

Johannes Frankenfeld

Co-owner and Managing Director of Brain Capital. Brain Capital is a German ISA company with approximately $165m in assets under management and has funded over 2,500 students from 22 private universities in Germany, Austria, France & Singapore partially through ISAs with reported default rate of only 0.5%.

Miguel Palacios

Professor of Finance at the University of Calgary, author of “Investing in Human Capital”, and Co-Founder of Lumni. “Investing in Human Capital”, published in 2004, argued in favor of using Income Share Agreements in the funding of education. Lumni pioneered ISAs at scale in Latin America and has attracted approximately $50m in financing and funded 10,000 students in the past 15 years.