A recent national survey has found that more than half of students and parents would prefer to use an income share agreement instead of a private student loan to help pay for college.
The report released by American Enterprise Institute centers around alternative financial products, such as income share agreements (ISA). With an ISA, borrowers pay a percentage of their income for a set number of years instead of taking out traditional loans.
After surveying 400 college and high school students and 400 parents, more than half of the people were in favor of using an ISA over a private student loan to pay for their degrees. It shouldn't come as a surprise when you consider the success from Purdue's ISA program.
Though the federal government has been recommending income-driven repayment plans for the last few years, borrowers still have to pay interest with that option. With an ISA there is no interest accrued.
ISAs are gaining more attention as analysts speculate how the federal government’s role in student lending could be reduced. Right now, ISAs are not meant to replace federal loans or the FAFSA, but instead help cover the gap left when a student reaches the federal loan maximum and doesn’t want to take out a private loan.
Both ISAs and private loans have their pros and cons. While a standard loan can be difficult to pay off if a graduate isn’t making enough money, ISA terms are based on projected income. So a person with lower predicted earnings will most likely get a less favorable loan term than a person who is expected to earn more. And while a borrower’s salary can change, the terms of the ISA won’t. The end result is that students who take out ISAs could end up paying more than they borrowed if they earn a higher income.
Image Copyright Sarah Mirk.