Golden Handcuffs

The Next Student “Loan” Rip-Off: “Income Share Agreements”

The student loan crisis in this country is getting a lot of publicity lately. Thankfully so, because it really is a very dire personal crisis for millions of Americans, especially millennials, and it’s high time somebody put the brakes on this runaway train wreck. But now comes along the next scam to take advantage of college students, and even worse, it’s being sold as a better alternative to traditional student loans, when it’s really a set of golden handcuffs.

An income share agreement (ISA) is a contract between a student and their school, whereby the student accepts university funding for their education, in exchange for paying the university a set percentage of their salary (usually about 5%) after graduation for a set number of years (usually about 10).

Contract terms vary from school to school, so the percentage rate you’ll pay depends on your major, how much you borrow, the length of your term, and the payment cap. Many will only provide you funding of up to 15% of what THEY project your salary to be based on your major, and some also impose a $10,000 maximum per year regardless of your major, meaning it’s likely all your costs won’t be covered anyway and you’ll likely end up with student loans ON TOP of your ISA.

So how does that look in a real world example? Let’s say your school costs $20,000/year for tuition and room and board. That means you’ll need $80,000 for the four years you’re there. A typical ISA would only provide $40,000 of that (4 ISA’s, one per year capped at $10,000 each). When you graduate and get a job with a modest starting salary of, say, $30,000, you’ll pay 5% of that for each of your four ISA’s. That equals $1500 per year for each contract, for a total of $6000 per year, for ten years, totaling $60,000 paid back on the original $40,000 they provided. However, if you had taken out a traditional student loan of $40,000 at a 5% interest rate for a 10 year term, you would end up only paying a total of $51,000.

To make it worse, you have to admit that a $30,000 starting salary for a college grad is on the pathetic side. If you stayed in that mediocre job at that mediocre salary for a full ten years without ever getting a raise, you’d pay back that $60,000 in the above example. But anyone with half a brain and a dollop of ambition will be making more than $30,000 ten years after graduation. If you get a raise to just $35,000/year after 5 years, you’ll pay back $65,000 on that $40,000.

But it gets worse! What if you are actually on the ball and get a job starting at $60,000/year right out of college? Even if you never get a raise in 10 years, you’ll pay that same 5% on your ISA and end up paying back $120,000 for the $40,000 they so generously gave you back then. Are you freaking KIDDING me?!?!?!

In other words: They’ll cap how much they’ll give you per year, and demand 5% of your salary for 10 years, for each of your four years of college. But, oh, there’s NO CAP on the total amount you’ll pay back. That’s totally fair. Uh huh. (Insert eyeroll emoji here.)

These ISA’s are structured so that the MINIMUM you’ll pay back is equivalent to what you would pay on a traditional student loan, IF you paid on that loan as agreed for the full term of the loan, which I would never recommend anyway. If you have a student loan, I’d strongly urge you to pay extra on the principal, LOTS extra, every month and knock that puppy out in 2, 3, 4 years or so, not keep it around for 10 years like it’s a pet. But these ISA’s will get at least as much money from you as a full term loan EVEN IF you get a crappy job with crappy pay and never make more than that. And I certainly don’t recommend you settle for a crappy job and crappy pay! You should aspire to a great job making great pay, but you deserve to keep the fruits of your labor!!

And hear me on this: I am NOT telling you to go get student loans either!! You absolutely CAN go to college without any debt, I promise you. I have LOTS of ways to tell you about. If you need any help planning your education without using debt, please please please SCHEDULE A FREE CONSULTATION to discuss it. I’ll help you.