What is an income-share agreement?

Income-share agreements are a new method that could help pay for college.

Piggy bank

The 4-H curriculum “Build Your Future” has a unit on Career FUNds that includes an activity on funding post-secondary education. The activity mentions grants, work studies, scholarships, loans and other options such as joining the military. There is a newer way to pay for college that has been gaining some attention: income-share agreements. Income-share agreements are contracts students have with colleges where the student commits to pay a percentage of their future earnings for a fixed period after graduation in exchange for funds to pay for their education.

Recently, Purdue University was the first four-year institution to launch an income-share agreement. Through the Purdue income-share agreement, graduates make payments for 10 years after graduation. The percentage graduates pay depends on their major and the amount of funding they receive. The less they make, the less they are required to pay. If they do not work, they do not pay anything. On the flipside, there is a cap on the total payments if the student does well financially after college.

While income-share agreements don't charge interest, that doesn't mean students will repay the exact amount they borrow. That's because an income-share agreement repayment rises and falls based on the student’s income during a prearranged period. It needs to be noted that income-share agreement terms vary from school to school and not many schools are currently offering income-share agreements.

U.S. News states, “While income-share agreements are often criticized for being unregulated and untested, more four-year institutions are expected to roll out these types of agreements, higher education experts say. Consumer advocates warn that the federal government needs to establish a cap on the terms that ISA providers can charge students as well as clarify legal uncertainty since these types of agreements are new to the marketplace.”

Remember that while income-share agreements are fairly new, the concept has gained popularity in recent years. Because of this, lawmakers need to develop better policy around income-share agreements before the idea can fully take off. The concept is new enough that it lacks any concrete regulation. Investors don’t know how income-share agreement should be treated for tax purposes, or how tax laws should apply to them. Income-share agreements could be an option for helping pay for college, but it is very important to do comprehensive research and work with tax lawyers and financial planners to make an informed decision. 

As a part of our work, Michigan State University Extension provides career education programming. To learn more about the positive impact of MSU Extension and Michigan 4-H career preparation, money management and entrepreneurship programs, read the Impact Report: “Preparing Michigan Youth for Future Employment.” For more information or resources on career exploration, workforce preparation, financial education or entrepreneurship, email 4-HCareerPrep@anr.msu.edu.

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