The cost of higher education in the US continues to increase and so it is inevitable that students will look for alternative ways to fund their education.

An Income Share Agreement (ISA) is a novel solution that is an alternative to traditional student loans in the US. ISAs are contracts between students and educational facilities, such as universities or colleges (‘learning institutions’), that allow students to fund their education in exchange for the educational facility receiving a fixed percentage of the student’s gross income (once they are employed in their field of study) for a set period of time. As students seek to avoid huge amounts of student loan debt, ISAs have been used by a variety of US institutions.

Started at Yale in the 1970s, ISAs have gained traction as a fairer, more aligned tool to finance college tuition. Universities like Purdue, Northeastern and Utah have ISA programs. ISAs are also sometimes provided by private companies. Students typically use ISAs as one part of their funding mix, on top of scholarships (free), federal loans (typically financed at a low interest rate) and as an alternative to private student loans.

Unlike a traditional student loan, ISAs borrowers are not obliged to make repayments when unemployed or when earning less than a threshold income. Instead, borrowers pay the lender a pre-agreed percentage of their income over a number of years, so if they are a good earner, they pay back more than the original amount borrowed. ISAs don’t charge any interest and so the amount repaid is the amount borrowed plus a supplemental amount under the agreement without added interest.

The key to a successful ISA is to fund degrees that are in strong demand, in professions with good salary growth where graduates often find employment quickly after graduating. Nursing, engineering and computer programming are some of the more popular professions where ISAs are made by private companies.

The Internal Rate of Return (IRRs) for private company ISAs could range between 10% and 20% and are highly dependent on when the borrowers find employment, their income after graduating, the increase in their income and other factors.

The repayment obligation kicks in once the student has gained employment, therefore, a graduate who is unemployed or earns less than the threshold does not have to make payments. Accordingly, there can be periods during which sharing payments temporarily cease. Obligations typically last from as little as a few years to as much as 10 years, so once employed above the threshold the borrower must make payments.

Payments are typically capped and the cap increases year on year. The sliding cap to repayments incentivizes repayments when possible and at the same time avoids “indenturing” the borrower forever. Payments are typically made via monthly ACH and income levels are checked against the tax returns.

Until recently, ISAs were not regulated at the federal or state levels. However, in March 2022, the Consumer Financial Protection Bureau (CFPB) issued a consent order that ISAs should be treated as private education loans under the Truth in Lending Act (TILA) and its implementing Regulation Z.

Ahead of this regulatory change in late 2021, Edly (an ISA lender), announced the creation of a new product called Income-Based Repayment (IBR) student loans. In partnership with a bank which originates the loans, Edly IBR loans combine the flexibility of ISAs with fully-FDIC-compliant loans and their associated protections for borrowers. Like an ISA, upon graduation, student borrowers pay a percentage of their post-graduation income for a period of time. The idea is to make student loans more affordable relative to their post graduating income. In order to qualify for an IBR, a borrower must demonstrate that they have a low income relative to their federal student loan debt. If a borrower does not find a job straight out of university that meets a minimum salary requirement, or if they lose their job, they are able to defer payment without penalty. In addition, after a period of time (typically 20 or 25 years) depending on when the loan was first granted, any outstanding balance is forgiven.

Source: Edly

Risk Warnings

This document is intended for the use of the recipient only and may not be forwarded, copied or distributed without our prior written consent.  The document has been prepared by MASECO LLP for educational purposes only and does not constitute investment, tax or any other type of advice and should not be construed as such.  The information in this document does not take into account the specific goals or requirements of individuals and you should consider carefully the suitability of participating in any investment prior to make any decision.

The views expressed herein do not necessarily reflect the views of MASECO as a whole or any part thereof. All investments involve risk and may lose value. The value of your investment can go down depending upon market conditions and you may not get back the original amount invested. Your capital is always at risk. Alternative strategies involve higher risks than traditional investments, such as speculative investment techniques, which can magnify the potential for investment loss or gain.  Although the information is based on data which MASECO considers reliable, MASECO gives no assurance or guarantee that the information is accurate, current or complete and it should not be relied upon as such.

MASECO LLP (trading as MASECO Private Wealth and MASECO Institutional) is established as a limited liability partnership in England and Wales (Companies House No. OC337650) and has its registered office at Burleigh House, 357 Strand, London WC2R 0HS. The partners are Mr J E Matthews, Mr J R D Sellon; Mr A Benson, Mr D R B Dorman, Mr H Q A Findlater, Mr E A Howison, Mr T Flonaes, Ms A L Solana and Mr N B Tissot.  For your protection, telephone calls may be recorded.

MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is registered with the US Securities and Exchange Commission as a Registered Investment Advisor.

1 Income means adjusted gross income, as reported for federal income tax purposes, increased by the following amounts: (i) the amount of any tax exempt interest income received; (ii) the amount of losses claimed as a limited partner in a limited partnership; (iii) any deduction claimed for depletion; (iv) amounts contributed to an IRA or Keogh retirement plan; (v) alimony paid; and (vi) any amount by which income from long-term capital gains has been reduced in arriving at adjusted gross income pursuant to the provisions of Section 1202 of the Internal Revenue Code.

2 Net Worth is the amount by which your total assets at fair market value exceed your total liabilities, with the following adjustments:

(i) the estimated fair market value of your primary residence is excluded from your total assets; (ii) the amount of any indebtedness secured by your primary residence up to the fair market value of such residence is not treated as a liability; (iii) the amount of any indebtedness secured by your primary residence that exceeds the fair market value of your primary residence is treated as a liability; and (iv) the amount of any debt secured by your primary residence incurred during the 60 days immediately preceding your purchase of any securities of the Company is treated as a liability (even if the estimated fair market value of your primary residence exceeds the aggregate amount of indebtedness secured by such primary residence), unless such debt resulted from the purchase of your primary residence during such 60 day period.

Income Share Agreements and Income-Based Repayment Loans

The cost of higher education in the US continues to increase and so it is inevitable that students will look for alternative ways to fund their education.

An Income Share Agreement (ISA) is a novel solution that is an alternative to traditional student loans in the US. ISAs are contracts between students and educational facilities, such as universities or colleges (‘learning institutions’), that allow students to fund their education in exchange for the educational facility receiving a fixed percentage of the student’s gross income (once they are employed in their field of study) for a set period of time. As students seek to avoid huge amounts of student loan debt, ISAs have been used by a variety of US institutions.

Started at Yale in the 1970s, ISAs have gained traction as a fairer, more aligned tool to finance college tuition. Universities like Purdue, Northeastern and Utah have ISA programs. ISAs are also sometimes provided by private companies. Students typically use ISAs as one part of their funding mix, on top of scholarships (free), federal loans (typically financed at a low interest rate) and as an alternative to private student loans.

Unlike a traditional student loan, ISAs borrowers are not obliged to make repayments when unemployed or when earning less than a threshold income. Instead, borrowers pay the lender a pre-agreed percentage of their income over a number of years, so if they are a good earner, they pay back more than the original amount borrowed. ISAs don’t charge any interest and so the amount repaid is the amount borrowed plus a supplemental amount under the agreement without added interest.

The key to a successful ISA is to fund degrees that are in strong demand, in professions with good salary growth where graduates often find employment quickly after graduating. Nursing, engineering and computer programming are some of the more popular professions where ISAs are made by private companies.

The Internal Rate of Return (IRRs) for private company ISAs could range between 10% and 20% and are highly dependent on when the borrowers find employment, their income after graduating, the increase in their income and other factors.

The repayment obligation kicks in once the student has gained employment, therefore, a graduate who is unemployed or earns less than the threshold does not have to make payments. Accordingly, there can be periods during which sharing payments temporarily cease. Obligations typically last from as little as a few years to as much as 10 years, so once employed above the threshold the borrower must make payments.

Payments are typically capped and the cap increases year on year. The sliding cap to repayments incentivizes repayments when possible and at the same time avoids “indenturing” the borrower forever. Payments are typically made via monthly ACH and income levels are checked against the tax returns.

Until recently, ISAs were not regulated at the federal or state levels. However, in March 2022, the Consumer Financial Protection Bureau (CFPB) issued a consent order that ISAs should be treated as private education loans under the Truth in Lending Act (TILA) and its implementing Regulation Z.

Ahead of this regulatory change in late 2021, Edly (an ISA lender), announced the creation of a new product called Income-Based Repayment (IBR) student loans. In partnership with a bank which originates the loans, Edly IBR loans combine the flexibility of ISAs with fully-FDIC-compliant loans and their associated protections for borrowers. Like an ISA, upon graduation, student borrowers pay a percentage of their post-graduation income for a period of time. The idea is to make student loans more affordable relative to their post graduating income. In order to qualify for an IBR, a borrower must demonstrate that they have a low income relative to their federal student loan debt. If a borrower does not find a job straight out of university that meets a minimum salary requirement, or if they lose their job, they are able to defer payment without penalty. In addition, after a period of time (typically 20 or 25 years) depending on when the loan was first granted, any outstanding balance is forgiven.

Source: Edly

Risk Warnings

This document is intended for the use of the recipient only and may not be forwarded, copied or distributed without our prior written consent.  The document has been prepared by MASECO LLP for educational purposes only and does not constitute investment, tax or any other type of advice and should not be construed as such.  The information in this document does not take into account the specific goals or requirements of individuals and you should consider carefully the suitability of participating in any investment prior to make any decision.

The views expressed herein do not necessarily reflect the views of MASECO as a whole or any part thereof. All investments involve risk and may lose value. The value of your investment can go down depending upon market conditions and you may not get back the original amount invested. Your capital is always at risk. Alternative strategies involve higher risks than traditional investments, such as speculative investment techniques, which can magnify the potential for investment loss or gain.  Although the information is based on data which MASECO considers reliable, MASECO gives no assurance or guarantee that the information is accurate, current or complete and it should not be relied upon as such.

MASECO LLP (trading as MASECO Private Wealth and MASECO Institutional) is established as a limited liability partnership in England and Wales (Companies House No. OC337650) and has its registered office at Burleigh House, 357 Strand, London WC2R 0HS. The partners are Mr J E Matthews, Mr J R D Sellon; Mr A Benson, Mr D R B Dorman, Mr H Q A Findlater, Mr E A Howison, Mr T Flonaes, Ms A L Solana and Mr N B Tissot.  For your protection, telephone calls may be recorded.

MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is registered with the US Securities and Exchange Commission as a Registered Investment Advisor.