ISA or Student Loan: Which Is Right for Your Future Career?
What if you could borrow money for school without having to cover interest? And what if you could repay the principal automatically and within as little as five years after graduating?
Those benefits might make the decision between an income-share agreement (ISA) or student loan seem like a no-brainer. However, you could end up paying more on an ISA than a student loan — that’s why it’s so important to project your income before choosing one financing option over another.
To help make the choice between ISA and student loan, let’s tackle the following questions:
What is an income-share agreement?
Stepping in where the federal student aid system and private lenders stop short, income-share agreement companies like Lumni and Align offer students a whole new bargain: Funding for higher education in exchange for a percentage of your income, if and when you land a job.
In some cases, ISAs are available directly from your school, which might partner with an outfit like Vemo to administer the dollars and cents. Among so-called ISA schools, Purdue University in Indiana, for example, has paid out almost $18 million and about 1,600 contracts via its Back a Boiler ISA fund.
As students look to skirt student loan debt, ISAs are becoming increasingly common. They could help you reach your cost of attendance if you’ve hit federal borrowing limits or are attending a school that’s ineligible for federal or private student loans.
Plus, if you don’t find the salaried job you were hoping to snag upon graduation, many ISAs won’t call for you to make payments (much like income-driven repayment plans on federal loans) — after all, there wouldn’t be a paycheck to partition.
Interest doesn't accrue onto the balance
Repayment only begins once you've hit an income threshold
Repayment won't drag on forever, halting at the end of the payment term or window (whichever expires first)
High income shares could eat into your budget, particularly when you have other debt or bill obligations
High payment caps leave potential for higher-income earners to pay two to three times their borrowed amount
Which costs more: ISA or student loan?
To determine whether to borrow an ISA or student loan, you’ll need to do the tricky guesswork of career planning. How much you could be reasonably expected to earn in your first job — and in the ensuing years — could point you toward one financing option over the other.
For a general comparison of cost between an ISA and student loan, let’s consider a borrower who expects to earn $50,000 postgraduate wage, using some arbitrary (but realistic) numbers.
|Should you borrow an ISA or student loan if you expect a $50,000 early-career salary?||ISA||Student loan|
|Income share (for ISA) / Interest rate (loan)||3.11%||8.50%|
|Payment window (for ISA) / Repayment term (loan)||100 months||10 years|
|* Assumes an average $50,000 salary for the duration of repayment|
If you’re not sure about what earnings estimate to plug in for your future career, consider these resources:
- Department of Education’s College Scorecard: View the median postgraduate salaries of students.
- Bureau of Labor Statistics’ (BLS) Occupational Outlook Handbook: Read about different professions, including the median and hourly pay, plus the job’s expected growth for the next decade.
And if you shop around for ISAs, ask your school or its third-party provider about the projected salary it used to determine your contract terms. Many schools, including Purdue University, have comparison tools available: Input information like your major and graduation date, and it’ll spit out your projected cost in repayment.
Which professions are more suitable for ISAs, and which for loans?
Aside from the fact that your major affects your college cost, it also typically leads to your career — and not all careers are generally suited for ISAs or student loans. Here are five common professions, and the financing option that could make the most sense.
1. Good fit for ISA: Web developer
Many coding schools and boot camps offer ISAs in exchange for more narrow training. Most recently, Make School was believed to become the first venture-backed school to offer an accredited bachelor’s degree in applied computer science. Accredited or not, however, these startup-style schools typically aren’t eligible for federal or private student loans.
When comparing these programs and their tuition, it’s imperative also to examine their ISA agreements.
At coding school General Assembly, for example, you’d be expected to fork over 10% of your $40,000-or-greater salary for four years.
2. Bad fit for ISA: Government or nonprofit employee
If you plan on working full time in public service when you’re done with school — but need to borrow in the meantime — you’re probably better off with federal student loans.
A big reason to avoid ISAs in this case is the potential to have your student loans forgiven under Public Service Loan Forgiveness (PSLF). After working for an eligible employer and making 120 prompt payments on an income-driven repayment plan, the remainder of your debt would be wiped away.
And while there are questions surrounding the future of PSLF, other student loan forgiveness programs exist that could help you with repayment. Yet, by signing an ISA agreement, you’d lose out on any chance of forgiveness.
3. Good fit for ISA: Artist
Working as a so-called starving artist could be a better use of this atypical tuition arrangement — after all, fine arts is among the majors leading to the lowest-paying careers, with working artists earned a median salary of $48,760 in 2019, according to the BLS.
Other trade school careers may also be good matches for ISAs for another reason: Your school or program might not be eligible for federal or private student loans.
If you’re into art but not so keen on math, be careful to check whether any ISA you sign will benefit you. For example, a private company might offer you worse terms (such as a higher percentage of your future income or a longer repayment term) because of your perceived career path.
4. Bad fit for ISA: Teacher
Much like government and nonprofit workers, teachers aren’t best suited to using an ISA. Although teachers are often on the lower end of the wage scale, there are a wide variety of options for educators to receive loan forgiveness or at least repayment assistance.
Beyond PSLF, you could obtain additional federal loan forgiveness via the government’s teacher loan forgiveness program. It can get up to $17,500 of your debt canceled after you work for five academic years at a low-income school or eligible education service agency. Consult a directory of eligible employers if you’re already eyeing the location of your future classroom.
5. Bad fit for ISA: Doctor
Although ISAs might be practical solutions for low-income earners, they’re not as cost-efficient for medical professionals. As a doctor, for example, you’d be paying out a percentage of what will likely be a six-digit income.
Some ISA agreements include caps on your repayment amount. If you were a pre-med student at Purdue, for example, and ended up being paid handsomely as a cardiologist, you may not have to pay more than double what you initially borrowed.
Still, an ISA could be a bad deal, at least compared with traditional forms of borrowing.
Should a medical school student borrow an ISA or student loan?
Say you’re a family medicine physician who’s just starting out, taking home $85,590 (the 10th percentile salary among your peers, according to the BLS). If you received $12,500 and agreed to repay 10% of your income over five years via an ISA, you’d shell out $42,795 — and that’s if your salary stayed flat.
Now say that you instead borrowed $12,500 in the form of a loan and agreed to repay it — plus 6.00% interest — over 10 years. Under these circumstances, the loan would cost you just $16,653 over the next decade, according to our student loan monthly payment calculator. (You could also prepay the debt, saving even more money.)
In addition, like public servants and teachers, medical professionals typically have more access to loan forgiveness programs and loan repayment assistance programs. The majority of states offer thousands of dollars in assistance, for example, if you’re a physician working in an underserved area.
Which is best for you: ISA or student loan?
An ISA is another tool to consider as you pursue higher education. But while it might sound great on the surface, it’s not always the right path for every student.
Run the numbers to ensure your projected salary won’t leave you paying more under an ISA than you would have paid to borrow federal and private student loans. Indeed, you should also ensure that you’re OK giving up some forgiveness and assistance options that you would have gotten with federal loans.
On the other hand, an ISA could be a great solution if your school isn’t eligible for federal loans or doesn’t work with reputable private lenders.
And if you’re still not sure which way to go between an ISA and student loan, consult our handy guide to paying for college