College 101
ISAs: The Student Loan Killer?
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ISA: Isn't Shmoop Awesome? Just kidding. Well, we are awesome, but that's not what ISA stands for in this context. Nope, we're talking about income-share agreements, which some experts claim will be the primary way some students pay for college in the future.
ISAs have several key differences from student loans. As we discuss those differences, we'd like to focus on this question: can ISAs really save you money in the long run? (If you actually enjoy spending money indiscriminately, we suggest you at least take us out for sushi every once in a while.)
The ISA is basically a way for students, or anyone else who needs a cash infusion, to sell stock in themselves. After borrowing the cash, the student will repay an amount to their investors which is a percentage of their post-graduate earnings for some predetermined amount of time. One lender, a company called Lumni, began offering ISAs of $12,000. Their repayment window was five years at a rate of 3% of the borrower's future income (source).
The difference between this kind of "stock" and a traditional loan is that the total amount that you repay in an ISA is variable. It's based entirely on how much your post-college job pays. If you earn less, then you pay less. Regular ol' loans have terms of repayment that are not relative to your future earnings.
This difference is notable because student loans are very hard to discharge, even after declaring bankruptcy (source). You'll be on the hook for your college loans until you get them paid off or until your hair's a bit grayer than it is now. Eep.
That said, if you end up making a lot of money, then you'll end up repaying an ISA lender more money than you would have if you had taken out a traditional loan. Furthermore, since companies only make big money off of ISAs if you succeed, they're more cautious with their lending approach. So not every student in ever major will be offered an ISA alongside all of those student loan offers.
In fact, ISAs may be a way for students and investors alike to gauge the value and quality of certain schools and programs of study (source). If investors don't think that you'll earn enough with your English degree to give them a good return on investment (ROI), then they'll probably just give the money to some hotshot software engineer instead. Sorry, friends.
This selection factor makes it unlikely that ISAs are ever going to completely replace the student loan system. However, some student loans now have repayment plans that are very similar to what you'd get from an ISA, known as income-based repayment (IBR) loans. A borrower under an IBR agreement repays 10–20% of their income rather than paying a fixed amount monthly (source). These repayments are less than ideal for some borrowers than either student loans or ISAs, but they're still better than having to sell your hair to make ends meet.
So, what's our advice? ISAs can be great for people who have strong earning potential and don't want to acquire student loan debt. The downside is that if you end up earning a ton of cash, then you'll end up paying a good amount of that ton back to your lending institution.
ISAs are also less practical for those of you whose post-grad plans involve traveling the U.S. writing raps about Socrates.
We don't think that ISAs will replace student loans tomorrow, but that doesn't mean you shouldn't look into one if it works for you. Whatever you do, it has to be better than philosophy raps, right?