ISAs vs. Student Loans: Which Are Costing You Least?

Income Sharing Agreements, or ISAs, are not student loans. But ISAs may make sense as an alternative to certain types of student loans, if they cost you less overall.

It is easy to calculate the payments for a traditional student loan based on the terms of a loan. But ISA payments depend on your post-graduate income. Because you can’t know this specific number, it can be difficult to tell how an ISA compares to a student loan.

NerdWallet looked at three scenarios to determine to what extent revenue sharing agreements compare with federal PLUS and private student loans. Here’s what we found, plus tips and a calculator for doing your own analysis.

How much you could pay with an ISA

To find out how much different earners would pay on a $ 20,000 ISA over a 10-year payback period, we looked at three income levels: $ 38,000, $ 52,000, and $ 75,000. These are rough representations of low, middle and high incomes.

We assumed that each income would increase by 4% per year and used three income sharing percentages: 3%, 5%, and 10%. Here’s how they stacked up:

You won’t always repay more than the amount you received with an ISA, but you likely will if you have higher income or have higher percentage terms.

You won’t always repay more than the amount you received with an ISA, but you likely will if you have higher income or have higher percentage terms.

For example, let’s say you get an ISA of $ 20,000 and agree to pay 10% of your income over a 10-year period. If you earn an annual income of about $ 75,000, you could repay almost $ 90,000; however, there is usually a cap on how much you can repay – don’t accept an ISA without a payout cap.

If you made about $ 52,000, you would still pay more than your funding amount at a 5% or 10% income share. The only time you would pay less than the original $ 20,000 would be if you had a small income share (3%) and a relatively low income – $ 13,687 for an employee of $ 38,000 and $ 18,730 for an employee of $ 52,000.

How does an ISA behave in relation to student loans

ISAs should complement federal undergraduate loans, not replace them. We compared our ISA results with two other types of student loans: federal PLUS loans and private loans.

First, we looked at a loan of $ 20,000 PLUS with an APR of 7%, repaid over 10 years. Then we looked at a private loan of $ 20,000 with an APR of 9% with that same repayment period.

We also wanted to see how ISAs compare to student loan refinancing, because it can reduce private debt. We looked at how much a borrower would spend after refinancing a $ 20,000 private loan at 5% APR and a new 10-year standard term after two years of regular payments.

Here’s how much each would cost:

In this example, an ISA is a cheaper option than PLUS, private or refinanced loans if you have a high income – as long as you only have to pay back 3% of your income. ISAs are also cheaper if you plan to earn an income of around $ 38,000, but only if you have 3% or 5% repayment terms of future income.

However, if you plan to make less money, you are less likely to get these favorable low percentage ISA terms.

How to estimate your ISA costs

Unless you have a time machine, there’s no way to decisively know if an ISA will cost you less than a student loan. If you are thirsty for certainty, stick to the loan and seek to refinance as soon as you can to save money.

  • Look at your school’s results. the Dashboard of the College of the Ministry of Education includes salary information for specific programs in schools. For example, film / video and photographic arts students at the University of Utah have a median salary of $ 23,000. But computer science graduates from this school earn a median salary of $ 73,000.

  • Consult the Bureau of Labor Statistics. BLS.gov can show the current median salary of your potential occupation and future prospects for that job. This information can help you determine how difficult it can be to find a job in your chosen field after graduation, as well as how much you could earn in the future.

  • Ask the lender for their calculation. The ISA provider will incorporate a projected salary into its calculation to determine the terms of your agreement. Some make this data available, such as Purdue University. But you can still see if the lender will share this information, so you can confirm if it’s realistic compared to the income data you found.

Income Sharing Agreement Calculator

Since ISAs don’t charge traditional interest – and therefore don’t have an interest rate – it can be difficult to compare them with student loans. The ISA calculator below will provide an interest rate based on your information.

Use this calculator once you have estimated your post-graduation salary and determined how to get an ISA to estimate the overall amount you will reimburse.

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