Would You Gamble on Your Future Earnings to Pay for College?
Imagine a world where you could afford school, and you wouldn’t have to worry about all that student loan debt interest piling up.
Sounds like a dream, right?
Well, it’s happening at Purdue University.
In 2015, Purdue announced a partnership with financial services company Vemo Education that would create a new way for its junior and senior students to pay for their educations: income share agreements.
An income share agreement, or ISA, is an arrangement in which investors lend money to students to pay for their college expenses. In exchange, the student agrees to pay back a certain percentage of their earnings after graduation. The percentage varies for each student, but Purdue’s program aims to offer percentages that make them a competitive alternative to private student loans.
ISAs have been popular in Latin America for more than a decade, according to Higher Ed Jobs, but previous attempts to introduce them in the U.S. have been largely unsuccessful.
Purdue’s ISA program is known as Back a Boiler — ISA Fund. It was rolled out in the 2016-17 academic year for rising juniors and seniors.
ISAs do not accrue interest. And because repayment is based on how much the student earns after graduation, there is no set amount the student must pay back.
Sound great? Maybe, but there’s a catch.
ISAs: Worth the Gamble?
Because you’re agreeing to pay back a percentage of your future earnings, an ISA is essentially a gamble. Some students could actually end up paying more under an ISA than they would with a student loan in the long run, depending on how much they make after they graduate.
“ISAs usually are not a good idea for students who expect to go into high-income jobs because the repayment is based on income and cannot be paid off early like traditional loans. These high earners can end up paying substantially more as a result,” said Andy Josuweit, CEO of Student Loan Hero.
Representatives at Purdue said that students who have received funding through Back a Boiler were approved if they were in good standing with Purdue, hadn’t had any adverse credit action taken against them, and had not already accumulated debt that would exceed 15% of their anticipated salary.
If you enter into an ISA, you’ll be required to submit regular income reports after graduation, including W-2s, pay stubs or other documentation to ensure that you’re paying back the proper amount each month.
According to Ted Malone, executive director of the division of financial aid at Purdue, there are consequences if you don’t meet the terms you agree to.
“Since it is a contract, it is possible to default on it by not making payments or not submitting required documentation,” said Malone. “The contract calls for demand of the maximum payable under the contract, and any standard legal remedies can be taken.”
When Does an ISA Make Sense?
So, why would I choose the ISA if it meant paying more over time and in the end?
The FAQ section of Purdue’s website explains that ISAs “could be a good alternative to private student loans and Federal Parent PLUS Loans.”
Josuweit said ISAs could make sense for students who need money on top of federal loans or don’t qualify for federal aid.
Another reason: ISAs have a defined number of years for repayment, and they aren’t always repaid in full.
Purdue’s program also would offer an advantage if I had problems finding a steady job post-graduation. There is a minimum annual income threshold of $20,000 while employed full time or seeking full-time employment to protect me. That means if I wasn’t earning at least $20,000, I wouldn’t have to pay until I was.
The advantage there would be that I could get away with not paying for the entire thing.
There is a maximum payment cap of 2.5 times the initial amount of money provided, which would protect me if I did end up making big bucks after school. In that situation, though, I could still pay less with a Federal Parent PLUS loan.
If I took time off from work to travel or start a family, my ISA repayment could go on hold for up to five years. Student loans offer you the option to go into deferment as well, but if you aren’t granted deferment and are allowed a forbearance instead, you will continue to accrue interest. Forbearances are good for up to 12 months, as opposed to the five years for the ISA.
To sum it up: If you’re likely to make a moderate to low income after school, or if you don’t qualify for federal loans, but want to avoid private ones, an ISA could be a good choice.
As always, be sure to consult with a financial adviser or a financial aid representative before making a decision about whether ISAs or any other options to finance your education.
Other Ways to Pay for College
There are even some schools out there that will cover your tuition; take them into consideration during your college hunt!
But if you want to know more about paying for college through traditional student loans, check out this guide.
Your Turn: What do you think about ISAs as a way to pay for college? Let us know in the Facebook comments!
Kelly Smith is a junior writer and engagement specialist at The Penny Hoarder and a senior at The University of Tampa. She’s paying off her credit card debt now so she can attack her student loan payments ASAP.