CRIF credit bureau and ET report that the total value of student loans in India in the year ending September 2020 totaled INR 11000 crore. Other countries like America, too are facing a student loan crisis. The Board of Governors of the Federal Reserve System report student loans in 2021-22 at 1,732,222.28 million USD. Those are disturbing statistics.
To combat the situation, many educational institutions around the world have introduced a new model called the Income Sharing Agreement or ISA.
What is Income Sharing Agreement?
An Income Sharing Agreement is an alternative method of paying college tuition. Under this method many universities and colleges – and other educational institutions around the globe have developed a new method of payment under which such institutions allow you to complete your course for free and promise to get you placement.
In exchange, you must promise to pay a certain percentage of your income for a certain period to the institution as postpaid fees. This is called Income Sharing and the agreement you enter into with the institution is called the Income Sharing Agreement or the Income Share Agreement – in short ISA.
Is an ISA legal?
The United States of America legally allows students and institutions to enter into an income sharing agreement. A few other countries have also legalized the contract. The law is different in different countries so if you are contemplating ISA to study within your country or exploring ISA to study abroad, you should research the legality of ISA in the country where you wish to study.
In India, no regulatory authority or law is governing ISA. As such, they are not supported by law. Since the Indian law is silent on the subject – indeed the subject is in its nascent stage – it would prudent not to comment on the legality of the agreement other than to say that it is not prohibited by law.
Also worth mentioning here is the fact that in India a contract is entered under the Indian Contract Act and is enforceable. However, an agreement is informal and may not necessarily be enforceable.
Legality notwithstanding, an ISA has distinct benefits and drawbacks. We’ll look into these soon but before that, here’s the math or how it works.
How does Income Sharing Work?
By definition ISAs allow students to pay for their education after they have completed the course. This seems like a perfect setup – and indeed it is if done right.
You complete your course without worrying about financing. The institution gets you a job. You pay for your course.
Simple right? Well not quite. Before we explain further here are some terms you should know:
- IS Percentage: This is the percentage of income you will be required to pay to the institute. Whether this is computed before or after tax deduction on the net or gross income will depend upon the agreement.
- Monthly Payment: Or installment. This is the amount you pay to the institute each month. The frequency is usually monthly though you may check with the institute about other payment options.
- Minimum Income Threshold: This is the minimum annual income you should be earning. If your income falls below this level, your ISA will be paused till such time you reach the threshold once again.
- Payment Cap: This is the maximum amount you will reimburse to the institute in any given installment.
- Payment Window: Or term. This is the maximum time allowed for you to repay the institute.
- Automatic Deferment: This refers to the automatic cessation of payment if your income falls below the threshold.
Institutions offering ISA promise to place you in a job that pays the minim income threshold so that you can begin repaying the institute immediately. In case they are unable to do so or your income falls below the threshold due to unpredictable circumstances such as illness or layoff, your installment will be paused with no penalty till such time you do reach the threshold. In any case, you must repay the entire fees within the payment window or you will be held in default.
That’s the basic framework for ISA. Specific agreement terms vary from one institution to another but in general, most agreements fall within this framework. For instance, some institutions may require you to pay off your tuition within a certain period while others may allow more flexibility in time and let you pay smaller installments. Some institutes may set an absolute payment cap while others may set it as a percentage of salary.
One seemingly unexplored area of ISA is that of prepayment. What if you have the funds to repay your entire tuition amount at one go?
To answer this and other questions like this, you should read carefully and understand completely the terms of the agreement before you sign.
Is ISA better than taking a student loan?
Many people perceive ISA as a loan. That’s because just as you would repay a loan, you would also repay your tuition fee to the institution where you completed the course.
However, an ISA is different from student loan in three important ways:
- Loans charge interest while most institutes offering ISA do not charge any interest.
- ISA is not regulated while loans are regulated by the central bank of the country.
- Unlike loans, there is no penalty attached to discontinued payment under an ISA.
- Loans may be prepaid if you have the funds. This aspect of ISA remains to be explored.
Income Share Agreements are comparable to 0% EMI schemes under which a buyer gets full use of the product while paying off the price in installments. Unlike physical goods for which title may be held, there is no title for education. This makes ISA different from other EMI schemes.
Am I eligible for ISA?
That’s the million-dollar question! Eligibility – and indeed the terms – of income share agreement vary from one institute to another. Some institutes base it on GPA or percentage of marks acquired in 10th or 12th standard. Others base eligibility on an entrance test. A lot depends upon the course you are taking and the placement you seek.
It is important to remember that most institutes offering ISA promise to give you placement for a job that pays a certain minimum annual income. It is therefore in their interest to ensure that the students are capable of applying for and securing such jobs after completion of the course. Because of this, there are usually strict eligibility criteria for enrolling in the course.
The Massai School for instance conducts a workshop and admissions are granted based on successful completion of the project in the workshop and a few other factors.
Fulfilling your Income Share Agreement
The biggest difference between an ISA agreement and a loan is the way it works. Under a loan, you pay a fixed amount each month irrespective of your income while under an ISA you only pay a percentage of whatever you earn. The burden of debt is, therefore, lighter under an ISA as compared to a loan.
Here’s how you can ensure you fulfill your part of the income sharing agreement quickly and efficiently:
- Make your payments regularly – set up an auto-debit on your account so that you never default.
- Ensure that you always pay the maximum possible – up to your Payment Cap – that way you’ll complete your repayment faster.
- If you have funds in hand, approach the institute and discuss an advance payment or recalculation of your ISA so that your installment amount is reduced.
ISA agreements are relatively new in India although they are fairly popular in the USA and a few other countries. Indians are therefore treading with caution – as they should. However, the benefits of income sharing agreements for students cannot be denied.
If you would like to know more about ISA or any of the other information on our website, we suggest you share your query along with your email in the comments. Meanwhile, order your copy of the BYN newsletter and join us on our Facebook Community for more discussions on education and career.