Income Sharing Agreements (ISAs)

Jan 19

Contributors

Anthony Zhou is a student at Columbia University studying computer science and psychology. His past projects have addressed issues like loneliness, mental health, and air pollution. He aims to understand how institutional innovations can expand educational opportunities.

Key things to know

As student loan debt becomes a growing issue, income sharing agreements have emerged as a promising alternative for financing college education. However, it is still unclear whether they are a practical alternative.
The “college premium” (wage gap between those with high school and college educations) has over doubled since 1980. Although the investment value of college is obvious, it’s difficult to obtain suitable financing because the loan periods are long and delinquency is often high. Hence, the federal government often steps in to subsidize loans.
Income sharing agreements (ISAs) are a method of financing education by promising a share of future earnings to the creditor, who can either be a private investor, the federal government, or the educational institution itself. In contrast to loans, ISAs cap the downside risk for borrowers — if the borrower doesn’t earn money within a certain time frame, they owe nothing. They also align incentives so that the creditor earns more when the borrower earns more.
One of the earliest ISA experiments was a 1971 to 1978 program organized by Yale University, which was canceled due to alumni complaints. Their popularity in the US seems to have cooled until the 2010s. Outside of the US, Lumni Inc has been running ISA programs since 2002 in Chile and Colombia.
A typical agreement involves a share (anywhere from 1% to 20%) of income taken for a payment term of 2 to 10 years, with an upside cap of 1 to 3 times the initial payment amount, as well as a lower bound on salary below which no payments are due.
ISAs come in two types: vocational program ISAs and university ISAs. They may be more effective in professional programs if deployed properly, as those have a clear pathway to immediate income. In a university setting, it’s too early to say whether it’s a suitable form of funding, and it must be considered in conjunction with existing governmental sources of funding.
ISAs often suffer from a lack of transparency and regulatory oversight, making increased regulation and financial literacy important for wider adoption.

Case study

Purdue University’s Back a Boiler ISA Fund

Purdue in 2016 launched an income-share program called Back a Boiler, which was backed by private investors. From 2016 to 2022, they distributed over $14.6 million to over 1000 Purdue students. The program was designed to bridge the gap remaining after federally subsidized grants and loans were exhausted in place of private loans.
The Back a Boiler loans typically involved a 10-year repayment period capped at 2.3 times the original payment amount, with an income minimum of $20,000. The specific income share depended on a student’s choice of major.
Despite public messaging about the success of the program, the Back a Boiler initiative was shut down in 2022. Some critiqued the program as a glorified loan with overly complex terms that duped students and families into paying more than they should have. The program was most negative for students who earned an income much higher than expected, being forced to pay 2.3 times the initial amount in order to terminate the agreement.
While it is too soon to definitively compare the results of these ISAs to the loans that these students would have secured otherwise, the Purdue Research Foundation remains publicly positive about the paused experiment.
One key takeaway for future experiments seems to be that transparency is essential and that students and parents often go into such agreements without full information about their future earnings prospects.

General Assembly’s Catalyst ISA

In addition to university funding, the other main kind of income-sharing agreement involves technical or vocational training programs.
General Assembly is a for-profit technical academy that offers an income-sharing agreement as one way to finance participation in their data science, web development, and UI design boot camps.
They were motivated to start the program because about half of the students who completed their screening process could not secure financing to participate in their training programs, often due to low credit scores. They figured that as a result of their high rate of post-program job placement, an income share agreement seemed feasible.
The terms of their Catalyst ISA ask for 10% of yearly income for a 48-month period after graduation, with a cap of 1.5x tuition. Students who make an income below $40,000 after the program are exempt from payments.
As a result, for higher-earning students, the terms of the program would cap tuition cost at $22,500, as opposed to the $15,000 for the base tuition or the $18,500 average loan repayment amount.
The Catalyst ISA program has been used by over 2000 General Assembly students since 2018, and in 2019 they also launched the Career Impact Bond program as a partnership with the nonprofit Social Finance. The program has since graduated over 800 students.
While the detailed financial sustainability of the program is hard to evaluate, it seems that General Assembly and other vocational programs may be able to offer more favorable terms than traditional Title IV universities like Purdue because their clearly professional focus is more likely to guarantee immediate high-paying job placement, thus also requiring less cross-subsidization and shorter payment terms.

Potential pitfalls

One big issue with ISAs is a lack of standardized regulation. Without a regulatory framework, it’s difficult to issue general advice on whether students and families should adopt ISAs, as the specific terms of each agreement can differ drastically. Thus, it seems important for lawmakers to establish clear regulatory standards around ISAs.
Another big issue with ISAs is a lack of knowledge on the part of borrowers. In comparison to loans, the mechanics of ISAs are often not well understood, leaving students on the hook for higher payments than they expected, often because their earnings exceeded what they expected.
Adverse selection is a potential risk with income sharing agreements. In other words, people who predict their future income will be lower may be more likely to choose income sharing agreements relative to traditional loan financing, thus making the income sharing agreements less sustainable.
From the supply perspective, ISA funders make money by cross-subsidizing tuition payments from higher students to lower post-grad students. This means that funders may have some incentive to convince higher-potential students to participate in the ISA program even if it is not in their best interest. While this issue is no different from the issues of other insurance markets, this is precisely why regulations enforcing agreement clarity are essential.
Another problem, related to adverse selection, is moral hazard, in which ISA participants choose to make less money during the payment term. One study of the Back a Boiler program estimated that while ISAs increased graduation rates by 3 percent, they also decreased starting salaries by $5000 on average.
Because of the ill-understood nature of ISAs, small changes in messaging or social influence can have significant impacts on adoption. For example, one 2024 survey-based study found that simply emphasizing the nature of ISAs as a form of insurance on future income increased hypothetical adoption by 43% (10 percentage points).

Income Sharing Agreements (ISAs)

Contributors

Key things to know

Case study

Potential pitfalls

Further readings

Participatory Budgeting

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