Kelly Bullis
Have you heard? College costs are astronomical and going higher. In desperate attempts to keep going to college, borrowing now and paying later has become the default action.
Problem with that solution is that the now-graduated student struggles with paying off the loans and has much disillusionment over the fact that their income isn’t high enough to give them the ability to pay off those loans and live a relatively normal life. Various solutions are being bandied about, such as the president attempting to have all U.S. taxpayers step in and pay off much of those student loans.
Well Milton Friedman suggested an idea way back in 1955. It is a financial option that is available today, but most folks do not know about it. It is called an “Income Share Agreement” or ISA for short.
In the normal college loan process, a student gets such a loan in the same amount no matter which program or school they select and irrespective of the salary they can expect to earn after graduation. An ISA on the other hand, considers the Return On Investment (ROI) of each major. It is more outcome based.
An ISA is a contract that requires students to pay a fixed percentage of their future salary in exchange for funding their educational expenses today. The student finishes making payments after a certain number of years (defined in the ISA) regardless of whether their balance is paid in full. Both the payment amount and the time to pay back the loan are capped.
ISAs ensure equal access to education funding because historical data like FICO scores and other socioeconomic factors aren’t relevant. Students from the same program receive the same terms.
You will usually find ISAs used more in trade schools and other vocational programs. Did I mention? ISAs are based upon the value of the degree. An art degree will be considered much less valuable than an engineering degree. (Unless you have a special last name and can find a bunch of Chinese and Ukrainian businessmen who will pay $200,000 and up for your paintings.)
The flexibility and affordability of ISAs has set them apart from conventional student loans. Payments are paused if income falls below a certain level or in the case of unemployment. With ISAs, students cannot be stuck paying for college 20 or 30 years after graduation.
Terms can vary depending on the funding provider, so look for ISA providers that clearly communicate their terms and make sure you completely understand them. The term of the ISA should not exceed 10 years and the circumstances and impact of payment pauses must be explicitly defined. Finally, the effective APR should be capped at a reasonable rate.
Have you heard? Prov 9:9 says, “Instruct a wise person, and he will be still wiser. Teach a righteous person, and he will increase in learning.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.