What are revenue sharing agreements and how they work
A revenue sharing agreement, or ISA, provides funding for the college that you pay back based on your future salary. ISAs are not student loans, and you shouldn’t be using them in place of federal undergraduate loans either.
Consider an ISA instead of high interest loans, such as Federal PLUS Loans or Private Student Loans, especially if you are considering entering a high paying profession. You will probably benefit from the most advantageous repayment terms.
What is a revenue sharing agreement?
An income sharing agreement is a contract in which you receive money for your education. In return, you agree to pay the ISA provider a fixed percentage of your income for a fixed period after you finish your studies. You can repay more or less than the amount you received, depending on the terms of your agreement.
“You agree to pay the ISA provider a fixed percentage of your income for a fixed period after the end of your studies.“
College ISAs date back to a 1955 essay by renowned economist Milton Friedman who explored the potential of investing in “human capital” to pay for education. Although formal ISA programs have gained momentum recently, they are still relatively rare.
Tonio DeSorrento, CEO and co-founder of Vemo Education, a company that sets up and manages ISAs for schools, estimates that around 50 colleges have their own ISAs. This does not include alternative education programs, like Lambda School’s online bootcamps for coding, which exclusively use ISAs instead of student loans.
Most ISAs are run by colleges for their own students, sometimes with private sources of capital. But you can get a revenue sharing agreement from some private lenders, such as Stride financing, which you can use in most schools.
How do revenue sharing agreements work?
Revenue sharing agreements are unregulated, so each can work differently. Typically, you will start repaying an ISA after you leave school and exceed a specific income threshold. If you lose your job, you can stop paying.
The amount you will pay each month and overall will depend on the specific terms of your ISA. The ISA provider will determine them based on characteristics such as your college major and projected salary. ISAs are not based on credit.
Percentage of revenue share. How much of your gross income you will pay each month. College ISAs typically have income shares between 2 and 10 percent, according to the 2019 State of the Income Share Agreement (ISA) Market report by Career Karma, a website focused on technology careers.
Salary floor. How much your salary must be for payments to be due. The salary floor for an ISA should reflect your expected post-graduate income. For example, Lambda School’s floor salary is $ 50,000 because it expects graduates to receive a starting salary of at least that amount.
Payment limit. The maximum you will have to repay under your ISA. The payment limit is usually based on the amount you received, for example twice that amount. Beware of ceilings greater than 2X borrowed, as well as ISAs that have no payout cap at all. You could reimburse much more than what you received.
Repayment period. How long does your ISA contract last. Repayment terms generally vary from two to ten years. Some ISAs will count the months in which you earn less than the minimum salary towards your repayment term. Others extend your repayment term in these cases.
Here’s an example of how these terms come together to make an ISA work:
Suppose your ISA requires you to pay 5% of your post-graduation income over a 10-year repayment term. If your salary started at $ 52,000 and increased by 4% each year over the 10-year period, you would initially pay $ 217 per month and $ 31,216 in total. If that ISA required 18% over two years, you would initially pay $ 780 per month and $ 19,904 in total.
Estimate your ISA payments
Is A Revenue Sharing Agreement Right For You?
Consider the example above: if you received $ 20,000, you would actually save by paying $ 19,904. If you paid $ 31,216, that would be like paying off a student loan with an interest rate of 5.23%, which is still a competitive rate.
You should compare ISAs and student loans to make sure you get the best deal possible. For an ISA, this will likely be the case if you know you’ll be heading into STEM, healthcare, or some other field with solid salaries and growth potential.