An Alternative to Student Loans: Pay for Your Education With Future Income

debtAs the cost of college climbs along with the average student debt burden, students and their families can be left in the lurch. Many take out private loans, often at high interest rates, to cover college costs. Now, a small but growing group of students are paying for part of their college education with a portion of their future earnings, using income-share agreements.

Participating students receive funding for their education by agreeing to pay a percentage of their income for a period of time after leaving school. Typical arrangements are 5% to 10% of income for 10 to 15 years, or 10% to 15% of income for five to seven years. Unlike a loan, an income-share agreement has no interest charges and no balance to be repaid.

For now, most income-share agreements are through private companies, but schools are wading into the market. Purdue University in Indiana recently began offering ISAs to juniors and seniors. “Purdue’s program tests whether we’ll see more schools and even some statewide systems offer ISAs directly to students as an alternative to private loans,” says Andrew Kelly, director of the Center on Higher Education Reform at the American Enterprise Institute.

Depending on how much you earn after college, you may pay back more or less than the amount of funding you received. The arrangement could save some people thousands of dollars compared with a private or federal PLUS loan, but it could cost those who land high-paying jobs far more. Some plans cap the amount that a student may ultimately repay, for example, at two or three times the value of the original contract.

(Source: TCA)