It's no secret that the United States is in the midst of a major student loan debt crisis. According to Business Insider, the level of student loan debt nationwide has risen from $150 billion in 2009 to $1.3 trillion in 2017. (Check out the scary graph in that article to get a sense of what that means -- it will give you nightmares.)
The good news is that colleges, universities, and even the federal government are actively looking for ways to address the problem for students.
One helpful tool that people who are currently burdened by student loan debt can turn to is this income-based repayment program for federal loans. If your federal loan payments eat up more than ten percent of your income, you should definitely look into this and similar programs.
For current and incoming students, schools are trying to offer more options than standard tuition. Let's take a look at the various tuition options:
In many cases, the cost of tuition is simply too high to be paid upfront. Paying tuition is like paying for a car or a house -- you'll probably want a loan to do it. Many people turn to federal loans, because payments and interest on these loans can be deferred until after you finish school, and the terms are usually the most favorable. Problems with student loans crop up when you don't finish school, when finishing takes longer than expected, when rates go up, and/or when you struggle to find a job that pays well after graduation.
Some schools offer a deferred tuition option, which means that you don't get charged for your education until after you graduate. How is this different from taking out loans that you don't have to pay until you graduate? Well, if you're making a good income, you might be able to pay your tuition bills without taking out a loan, and that lets you avoid interest payments, which are what cause the biggest problems for a lot of people. Deferring your tuition also means that you don't hold debt while you're in school.
Income Share Agreements
The concept of income share agreements was actually developed in the 1950s, but the idea has taken hold in the last few years. An income share agreement or ISA is a supplement or replacement for tuition that offers students a debt-free education option. It's an agreement between the school and the student that says, we'll give you an education, and in exchange you'll pay us a portion of your income for a set period of time.
With an ISA, you don't hold any debt, and you won't accrue interest. Your monthly payment will be determined by your monthly income, and because your payment is a percentage rather than a fixed number, the idea is that you should never get into a situation where you can't pay and end up in financial trouble.
A Closer Look at Income Share Agreements - What You Need to Know
The tricky thing about ISAs is that they aren't federally regulated. Unless you live in New York, there are no specific guidelines that schools have to follow with their ISAs. That means that ISA terms and conditions can vary widely from school to school.
Here are some important questions to ask about any ISA that you're considering:
When will my income repayment period begin? You can generally expect a grace period of a few months before your repayment term starts.
Is there an earning minimum? If you can't find a job or end up with a low paying job, make sure that you won't be responsible for paying more money than you can afford.
Is there an earning cap? If you make great money, you could end up spending more than twice as much with an ISA compared to traditional tuition. Find out if your school caps the amount that you'll need to pay.
How long is the term? ISAs can require repayment for anywhere from a few months to more than a decade, and your salary could vary greatly during that time.
What percent of my income will I need to pay? At the low end, you can expect to pay 3% of your income, usually for ten years or more. At the high end, you could pay 25% of your income, but usually for a much shorter term.
Can I combine my ISA with other payment options? Many schools use ISAs as a supplement to tuition.\ If you're considering an ISA, check out this list of terms to get a better sense of the questions you should ask, and make sure to do the math. NerdWallet has a few helpful articles that weigh the benefits and drawbacks of ISAs compared to other education funding options.