Paying for college usually involves big checks and often loans, even after scholarships are awarded and discounts applied. Now a third way to finance the rising cost of higher education, known as an income share agreement, is getting some traction.
ISAs are a substitute for loans. Instead of a student repaying the money they've borrowed plus interest starting soon after graduation, they forfeit a portion of their employment earnings for a number of years, usually up to 10.
(Related: How American Families Pay for College: 2017)
The percentage of income collected and the duration of the forfeiture depends on a student's major, and payments are usually suspended when they have little or no income.
A student with a tech-related or business-related major will likely have an ISA that's shorter in length with a smaller percentage of income collected than a student majoring in English or anthropology.
Whether or not an ISA costs a student less than a loan will depend on the exact terms of the ISA versus the terms of a loan for the same amount. Also key is whether the ISA sets a cap on how much money will be paid out.
ISAs are usually restricted to rising juniors, students in the second semester of their sophomore year who have declared their academic major. With that information in hand, the ISA provider can calculate the percentage of a graduate's income that will be used to repay the funding.
Purdue University, a public land grant university in West Lafayette, Indiana, has distributed about $2 million to 160 students via its Back-a-Boiler ISA program, which started in 2016.
Lackawanna College in Scranton, Pennsylvania, and Clarkson University, in Potsdam, New York — both private institutions — have started ISA programs more recently. All three are working with Vemo Education to design and implement their ISA program. Lumni is another firm that designs and manages ISAs in the U.S. and is also involved in Latin America.
(Related: 7 Tips for Repaying Student Loans)
In early February another firm, Paytronage, founded by two graduates of the Wharton School at the University of Pennsylvania, introduced a variation on the same theme, an online marketplace that connects institutional sources of capital to students interested in ISAs. Financing comes from investors, not universities or their foundations as is usually the case for universities offering ISAs.
