Income Share Agreements vs Federal Loan Programs

When it comes to non-federal income share agreements (ISAs for short) there are a few key differences between them and federal loan programs.

  1. Federal loans are not underwritten based on the expected value of education programs, income share agreements are.
  2. The federal government gives out loans with the same terms regardless of the school attended (i.e., the government charges the same interest rate for someone attending Harvard as that for someone going to the California School for Basket Weaving). This does not provide prospective students information about the value of different options.  It allows individuals to enroll in programs that are much more expensive than they should be.
  3. Federal PLUS loans allow borrowing up to the cost of tuition.  Therefore, all institutions are essentially considered “affordable” in the government’s eyes.

Generally, issuers of ISAs see a return on their investment when the aggregate amount repaid under an ISA (determined as a percentage of the ISA recipient’s income) exceeds the financed amount of their education over a fixed time period.  As a result, ISAs must limit the amount of financing available to programs offering a poor return on investment.  This is a significant strength relative to federal loans.

ISAs also offer advantages in terms of cost containment and would help reduce the out-of-control tuition raises that have occurred in the last two decades.  ISA investors have reasons to customize the terms they offer students resulting from the expected value of each program. Therefore, valuable programs that raise prices would not be doing so just to do so. It would also open up opportunities for competitors to offer more attractive tuition rates. (We will be following up with future articles to explain why this is the case for the points mentioned above.)

ISAs do not just offer credit to anyone for any reason as federal loans do. Instead, they align the interest of the student and the financier.

These positive characteristics of income share agreements are why FitBUX is offering them as a funding and refinancing option for individuals.  To sign up for our trial program or for more information click here.  If you have questions, feel free to contact us.

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