Income share agreements are growing in popularity as a way to pay for higher education and job-training programs. It’s when a participant receives funding for their education or training in exchange for giving the lender a portion of their income in the future. But as with most agreements, there are risks involved. Rebecca Ryan, economist, futurist, and founder of NEXT Generation Consulting, breaks down the pros and cons of an agreement like this, and what factors to consider before entering into an ISA.

Opening Bell

How to Pay for Higher Education with Income Share Agreements

here with more insight Rebecca Ryan economist futurist and founder of Next generation consulting. Can you tell us more about essays and how exactly they work? We gave a brief overview but tell us more. Yeah. And I. S. A. Is an income share agreement and it reminds me I had an intern several years ago, she was an undergraduate program at N. Y. U. And before her final term started she came to me and said hey I have a $10,000 gap, would you make me a personal loan? And I did. And then after she graduated and she had a job, she paid me back. That's very similar to what income share agreements are. The student receives a loan not from an individual but from an organization usually. And then after they graduate and get their job at a after a certain level of pay maybe $20,000 or $50,000 after they reach that threshold they start paying back a share of their income. Yeah. So what are the benefits of using an I. S. A. To pay for higher education or job training? Obviously for the recipient you have more time. You also um don't have interest during that time. I would think until you actually secure employment after you finish your training or you get your degree. Um But are there benefits on the other side as well? Yeah, there are benefits for both sides. So let's start with the student like you said, I mean college has gotten so expensive additional training has gotten so expensive but there's a huge interest in it right now. That great migration means many people are thinking about how they can upscale and get a better paying job. So the time is perfect for this right now. So for the student, what these loans do is they give an opportunity, you know, you might have a funding gap where you can't quite Make make the entire tuition payment. So these essays can help you make the, you know, across the funding gap on the side of the lender. Honestly, I mean it's usually a money making activity. So lenders who make that loan to those students get back 5%, sometimes even more. So there's a, there's a win win, but it's not perfect for every situation because as you mentioned, there are risks. So for lenders, the risk is not being repaid. If a student gets a job that doesn't pay as well as the terms suspect they will or expect they will, you might not make the money back. And for the student, one of the risks is if you do go on and get a really high paying job and that lender gets a share of your income for a portion of time. You could end up paying paying multiples two x three x what you would have paid if you had just paid the $10,000 or the gap in the funding. That is so interesting because that was my biggest question is what does the timeline or some of the requirements with these contracts look like from the outside and what you've experienced? Great question. So for students looking at this today, please know we're still in a bit of a Wild West situation. All terms and lenders are a little bit different. So the nerdwallet has got a great calculator where you can plug in. You know what the amount is, what the repayment terms are on the loan. And I would strongly recommend that students and or their families look at several I. S. A. S. You know, don't just look at one, look at terms across several I. S. A. S. So for you know in terms of what students want to do is make sure that um they've got a salary floor, you know that they don't have to start repaying this loan until they hit $50,000 or some amount to cover their basic living expenses. You also want to make sure that you're not paying more than 10 years if it's more than a ten-year term. Look the other direction. Um you also might want to look at what the forgiveness clauses are or what the considerations are because let's face it, we're living in an uncertain world. Um We don't know how far this pandemic is gonna go, you might end up changing a job or taking a leave of absence. So you want to work with a lender um That isn't just hard and fast and you must pay back or default. You want to work with the lender who's gonna understand that life happens and you might need to take a break from repayment. I appreciate that you bring up uncertainty because you had mentioned that there is no better time for this kind of vehicle for education or training right now but on the same side of the token um I also see a lot of guests coming on the show talking about the labor market which is relatively healthy but we are seeing specific industries like the tech space being hit hard. A lot of companies also we're sending job offers right now. What do you think the landscape looks like for the I. S. A. Considering a lot of the uncertainty we're seeing right now. Well I want to take the student's perspective on this. You know the person who's going to be taking the loan if you are a student going into a career field with very high demand and good pay nurses, computer programming. Fintech MedTech and I. S. A. Is something that you will probably be able to afford but make sure it's not your entire portfolio. I mean ideally what you want to do is get scholarships and grants because that's free money. You don't have to repay it. Things like loans, things like I essays should be used to bridge the gap not as the main form of paying for your higher education. Really good note. There are also growing calls to forgive student loan debt here in the U. S. Do you think that I. Essays should be included in this conversation? Since they are technically loans or do you believe that they're in a category all on their own? This is a this is a tricky question for me because on the one hand financial loans can be very difficult to understand. I mean if you've ever sat across from somebody and signed page after page after page of the agreement, it almost feels like these things are designed to be tricky and to trip you up. You know, that's what it can feel like. So on the one hand, I can see loan forgiveness as being a way of trying to help people who might not have known what they were getting into. On the other hand, I can see that we're going to continue to have to have loans because when you look at the amount of tuition required to attend college today and you think about how families median incomes have stayed stable over time there's a gap there. So we've got to invest in financial instruments that are going to help students get the degrees that they want and this is one innovation in that space. All right, Rebecca Ryan economist at futurist and founder of Next Generation consulting, really appreciate this interview. So fascinating