Income Share Agreements – A Student’s View
This is Aaron Pisacane, Product Lead of Student Loans and Personal Loans. As always, I am interested in innovation in financing college education.
An unexpected college student encounter: Let’s go to a real-life encounter that I had in Philadelphia on Saturday, October 5th at 9:30 am at the One Shot Café where hipsters go for their morning java. On the second-floor seating area, I was meeting with a British consultant friend of my girlfriend while talking student loans and income share agreements over two well-made, cappuccinos. The discussion changed to Income Share Agreements, my recent interest. College women at two crowded tables next to us were apparently listening in and soon boldly approached our table. I turned my attention to them with caution and prudence, but as always ready for a spontaneous espresso talk on education finance
ENTER – Temple University graduate student #1: “So you really work in the student loan industry and you know student loans? I am up to my eyeballs in student loan debt!”
Aaron: (Private thought) The student’s tee-shirt indicates that she is a graduate student at Temple University.
Aaron: “If you don’t’ mind my asking, how much student loan debt to you have from undergrad?”
TU graduate student #1: “I have about $50,000 of undergrad student loans…and I need more for graduate school.”
Aaron: “I feel your pain. I really do. Student loans should be used within a level that provides for a reasonable about of debt relative to your expected starting salary. Ideally, total monthly student loan payments should be around 7-15% of your gross monthly expected-starting income. There are nuances to this range, but affordability and debt planning are the goals.”
TU graduate student #1: “That’s a great idea, but for my undergraduate degree where I racked up $50,000 in student loans, I never had that guidance from anyone.”
Aaron: “It’s not hard to do at the front-end by lenders and/or financial aid offices. One lender actually guides students as to their projected total student debt payments and expected starting salaries. They calculate projected monthly payment as a percentage of projected monthly income based on field of study with a warning if it is a high percentage. Perhaps, it is beneficial for students, especially freshmen to see the impact of student loans for the present as well as beyond graduate school.”
ENTER – Graduate student from another table
Aaron: (Private thought) Remember your Moody’s Investors Service credit committee days, when you had to defend your credit analysis against a table of eight senior credit committee members when you were in your 20’s.
Temple University graduate student #2: “I am tired of student loan debt. I need options. What are my options?”
Aaron: “I explained to this graduate student that Income Share Agreements are a new option for financing education. Income Share Agreements are not debt, but equity. A school lends you say, $50,000 in return for a fixed percentage of your income, say 7% over a set time period of 10 years, for example. Once you have paid $75,000 (150% of the amount advanced by the college), you are done. If your income is zero after graduate school or below a $[40,000] threshold level, you will pay nothing. No interest accrues and the amount to pay back stays at 7% of your annual income. After 10 years, you have no obligation to pay anything more.”
TU graduate student #1: “I like that, especially given the amount of student loan debt that I already have taken on since undergrad.”
TU graduate student #2: “Student loans really make me sick. That sounds interesting.”
Aaron: “It’s important for students to have choices when paying for college. It is also important to be educated before taking on student loans or income share agreements. It is analogous to corporations that finance itself with a mix of debt (student loans) and equity (income share agreements), the mix will vary depending on your risk appetite, expected starting salary and occupation.”
TU graduate student #1 and #2: “Thank you for sharing this information, which is new for us. It’s interesting to know about another option.”
Aaron: “Happy to have spoken to you both, and I truly empathize with the pressure that you have in studying while figuring out how to pay for graduate school.”
Income Share Agreements (ISA)
ISA have been getting more attention as of late. By 2019, this overview will be dated as momentum builds legislatively for a first-time Federal regulatory framework, colleges become more receptive, press coverage grows and Gen Z students find it as an attractive alternative or supplement to student loans.
New Senate Bill introduced in July 2019
A bipartisan coalition that includes Senators Mark Warner (D-Va.) and Marco Rubio (R-Fla.) introduced the ISA Student Protection Act,. This Act would provide consumer and financial protection for students willing to give up a fixed percentage of their future income in return college funding. Other sponsors are Senators Todd Young (R-Ind.) and Chris Coons (D-Del.), which represents the first bill with bipartisan support in the Senate to create a legal and regulatory framework for ISA.