In 2016, Wake Forest graduate James Bacon made the decision to pursue higher education. After paying for his four-year education and taking out student loans to cover the rest, he figured he would do the same for his graduate degree at the University of Pennsylvania.
Ultimately, however, he discovered a program that would cover his tuition without any student loans on the condition that he agreed to lose a percentage of his salary later. A Revenue Sharing Agreement (ISA), as these contracts are called, is what made it all possible.
According to Bacon, a revenue-sharing deal was ideal at the time because it allowed him to avoid taking on more student loans. Not only that, but he loved that the future monthly payment would be predictable and based on his income.
“When I made more money I could afford to pay more, but when I didn’t I didn’t have to worry about taking the job I wanted and being able to support my family.” , did he declare.
This flexibility is what led Bacon to work with his brother-in-law on a business called Edficiency, planning software his brother-in-law had built for his own school that had already expanded to 20 schools the year before. If he had had to pay fixed student loans instead of an ISA, it is possible that he would not have had the chance to work at a start-up with a lower salary, he says.
How do revenue sharing agreements work?
If you are wondering how revenue sharing agreements work, they mostly work the way they would. Financial attorney Leslie Tayne of Tayne Law Group says revenue sharing agreements usually come in the form of a contract between a student and a school or a third party. The main point of an ISA is to allow the student to avoid loans if he agrees to pay a percentage of his salary for a fixed period, provided that this salary is within certain thresholds.
For example, Tayne says a school could have a revenue sharing agreement for 20% of a student’s salary for two years, with a threshold of $ 40,000 / year and a maximum payout of $ 30,000.
“If the student was earning $ 50,000 per year, he would pay $ 20,000 over those two years,” notes the lawyer, adding that a student earning $ 100,000 per year would pay $ 30,000 during this period due to the maximum payment limit.
According to Tayne, there are many potential benefits for students who qualify for an ISA instead of student loans. When student loans are based on a fixed loan amount plus compound interest, income sharing arrangements are dependent on the student’s salary. Not only that, but a student who loses their job would not be required to make payments until they find another job that meets the income threshold.
Mark Kantrowitz, author of How to Appeal for More College Financial Aid, also points out that if your income falls below a certain threshold, the payment obligation for an ISA may be suspended.
“After all, the lender wants to get a percentage of your income when your income is high, not when it is low,” he says.
Additionally, Kantrowitz says ISAs may be a good choice for students whose religion or culture prohibits the payment of interest, such as Russian Islamic and Orthodox students.
Disadvantages of revenue sharing agreements
Interestingly, students who use an ISA may end up paying more for college than they would if they had borrowed the money directly. It all depends on how their contract is drawn up and what they end up earning in their future careers.
“Some students, like students in lucrative fields of study, may end up paying more with an ISA than they would with a student loan,” says Kantrowitz.
He also points out that unlike student loans, ISAs are not regulated. This means that people considering this type of deal will need to dig deeper into the fine print in order to understand exactly how much they will have to repay, under what terms, and the total cost of using the ISA.
While Bacon is happy with the outcome of his ISA situation, he also points out that ISAs offer less flexibility in terms of repayment. Specifically, he didn’t like the fact that you had to keep paying for a certain number of years and usually couldn’t pay off your ISA any faster.
Who should consider an ISA?
Taking out student loans to pursue higher education isn’t the end of the world, but would an ISA make most people better? It really depends on the individual and their goals, says John Ross, CEO of Test Prep Insight.
Ross says students who land well-paying jobs after graduation, such as an electrical engineer earning over $ 100,000 a year, can end up writing a big check to their university each year – potentially more than they do. would not have done if they had chosen to borrow the money.
The key is for students to do their research on what they can expect to earn in the first five to ten years after graduation and examine the terms of both funding models, Ross explains.
“If a student has to earn a significant amount of money after graduation because they work in a lucrative field such as engineering, medicine or law, direct student loans, especially federal loans, may be preferable. . “
That being said, Ross says revenue sharing agreements can be a great fundraising strategy for students who don’t expect to make a lot of money after graduation. If you’re pursuing a career in a field that you love but maybe it doesn’t pay off much, for example, you might end up paying less with an ISA than with student loans.
Tayne also says that students who are unsure whether the career they are pursuing is right for them may be a good candidate for an ISA.
“If they can’t find a job that pays enough or decide the field isn’t right for them, they might not have to pay,” she says.
The bottom line
Only you can decide if an ISA is worth exploring, or if you prefer to borrow for college the old-fashioned way. Whatever you do, calculate the numbers for each scenario so you know how much your degree will cost at the end.
While ISAs are growing in popularity, they have the potential to cost students more in the long run. Student loans aren’t perfect either, so do your research and choose your poison accordingly.