Colleges starting to offer student loan alternative: Income-Share Agreement

by John Benson

High school seniors are preparing for graduation, which for many means college is right around the corner. That can lead to a conversation about how to pay for college.

LendEDU, a marketplace for student loans and student loan refinancing, reported that annual undergraduate tuition, fees, room and board cost an estimated $25,290 at public institutions and $50,900 at private colleges.

In addition to student loans, there’s a new way to fund a college education called an Income-Share Agreement. This involves a lender covering college costs using an agreement that stipulates the student will repay the loan in the form of a fixed percentage of future earnings for a set period.

Although Ohio colleges are not yet offering ISAs, Purdue University in Indiana has its Back a Boiler program, advertised as an alternative to student loans.

The Lima News reported in 2017 that a Purdue graduate received $16,000 through an ISA in his second year of school. Today, 5.89 percent of the monthly income he earns for the next eight years goes towards repaying the ISA. The total amount repaid will equate to 2 1/2 times the initial $40,000 multi-year loan.

That graduate said the ISA is straightforward and easy to understand, with payments he can afford earning entry-level wages. But others earning higher salaries out of school could end up having to pay back an amount that ends up being higher than a student loan payment with interest.

U.S. News & World Report said so far, nearly 500 Purdue students have taken advantage of Back a Boiler, which has funded $5.9 million in loans.

Sallie Mae data revealed that in 2017 and 2018, about 47 percent of college costs were paid by family income and savings, while approximately 28 percent were covered by scholarships and grants. That leaves about 24 percent of costs covered by borrowing.

The latter comes in the form of student loans. Fast forward four years, and LendEDU said the average public institution graduate has nearly $27,000 in student debt, while the private college graduate has $31,665 in student debt.