How a Revolutionary Financial Product Could Reshape Student Debt
By Hunter Spillan
It doesn’t take an expert on economic theory to know that the student debt crisis is out of control. A rise in the cost of higher education, exploitative interest rates, and increasing defaults have led to over $1.6 trillion in overall student loan debt in the United States—a figure that’s only expected to rise going forward. Loan forgiveness and employer contributions to student debt have been floated as potential solutions, but national-level action takes time and, perhaps more importantly, a government that is able to pass bipartisan legislation. For the time being, the student debt crisis appears to be a thorny mess with no clear resolution in sight. Yet students must still pay for their education in the meantime. Enter Income Share Agreements (ISAs), a model for funding education that disrupts some of the most problematic aspects of traditional student loans. Here’s everything you need to know:
What is an ISA?
At the most basic level, an ISA is an agreement between an investor —who provides money—and a student, who repays them. However, instead of paying back money at a given interest rate, the student agrees to pay a fixed percentage of their income to the lender over a period of time. In this sense, the ISA serves the same function as a traditional student loan, but depending on the terms of the agreement, an ISA can be much more beneficial to the borrower.
What does a typical ISA look like?
At Stride Funding, the income percentage is generally between 4-8% and does not exceed 10%. One important difference between an ISA and a student loan is the protections that ISAs provide: for example, borrowers do not have to pay back any money if they are unemployed or if their income is below a certain threshold. This increased flexibility is one of the major advantages of an ISA; keeping students from being saddled with debt they have no means to pay off reduces loan defaults and is a more realistic approach to financing education.
How do ISAs compare to a typical student loan?
The final amount that an ISA will end up costing depends on the terms of the agreement and, of course, the borrower’s income. An ISA could end up costing less than a loan, as shown in the example below. Note that Stride ISAs are capped at twice the original amount to protect students from overpayment that could arise from exceptional success in their careers.. Furthermore, the timeline is shorter, allowing students to finish payments in half the time of the traditional student loan.
What about the intangible benefits?
ISAs provide students with the peace of mind that their payments will always be proportional to their income, ensuring that repayments are always manageable. This reassurance could go a long way towards alleviating the mental burden of student debt. Students these days are risk-averse and debt-wary, and rightfully so. With a traditional loan, the financial burden of an unexpected recession is placed entirely on the student. With an ISA, the investor has to assume the risk that is normally passed off onto students, freeing up students to pursue degrees they would not otherwise be able to. Secondly, ISA providers are actively invested in students’ professional success. As a result, Stride Funding offers professional development opportunities and career counseling in order to support their students.
Is an ISA the right choice for me?
Ultimately, the decision to pursue an ISA is highly personal and must be evaluated on a case-by-case basis. Though originating as a means of financing coding boot camps, ISAs have been expanding into both graduate and undergraduate programs. ISAs can work for a broad range of programs, including healthcare, engineering, and business. If you’re wondering if an ISA is available for you, it doesn’t hurt to reach out and see if you’re eligible.
What do ISAs mean for the future of student debt?
ISAs are already receiving wide-spread media attention and student interest. While some legislators argue that the focus should be on cutting back the cost of education rather than changing funding methods, ISAs are undoubtedly picking up steam as a present-day solution to a historically broken system. Many current ISA players, such as Stride Funding, are proactively incorporating consumer protections sought by legislators. Whether the ISA industry continues to be privately-backed or federally-run remains to be seen, but it seems clear that ISAs are here to stay.