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Is an income-sharing agreement right for me?

Student Career Placement Consultant

We all know that a college education can be a very expensive proposition. More than two-thirds of college students in the U.S. graduate with some type of debt, and  the current average amount that is owed by graduates with debt is close to $40,000.

Some people have suggested an alternative to student loans that has gained notice in recent months because Purdue University has become a supporter. That alternative is the use of income-sharing agreements, also known as human capital contracts. Under an incoming-sharing agreement, an organization will provide funds to a student for college expenses in return for an agreed-upon percentage of their eventual income for a set number of years.

Although the formulas that create the arrangement can be complicated and will vary significantly, some students have found this to be a valuable resource.

The factors that affect the agreement include:

  • The student’s major.

  • His or her estimated earning capacity after graduation.

  • His or her graduation date.

The features of this type of plan that appeal to students and their families include:

  • Its affordability: Payments will be based on the actual salary that a student earns after college. This means that it’s unlikely that a student would get locked into an unaffordable payment.

  • The salary percentage and time period are set by the agreement, so it’s possible that a student who takes a job paying less than the amount anticipated by the formula will actually repay less than the funded amount. Here’s an example based on the Purdue University model: Say you’re a finance major who will graduate in May 2018, and you need $32,000 to cover college expenses. The formula assumes that your starting salary will be $53,000 and that you will get a 3.7% raise each year. Based on those figures, the agreement would require you to pay 9.70% of your salary for 8 years. The total amount you would pay, if the salary estimates are accurate, is $48,666. However, let’s say that you decide to take a job in government with a lower starting salary, and that you don’t get those 3.7% raises. That decision does not affect your agreement: You will still pay 9.70% of your salary for 8 years. Thus, if your new job pays only $40,000 per year, and you don’t get any raises (for the sake of this example), your total payments would only be $31,040.

  • The estimated repayment total is typically lower than a government or private loan for an equal amount of funding. Using the example from the previous point, a $32,000 government loan at 6.84% would generate repayment of $49,672 and a private loan would require $57,554—both regardless of the student’s actual income.

  • The repayment period is typically shorter than the repayment period for private or federal loan programs.

  • It’s not a loan, so no interest accrues.

There are, however, some downsides:

  • There’s no way to know how much the student will end up repaying. It’s possible that a student could find a job paying more than the formula anticipated, so the repayment could be significantly more than the debt. However, some organizations place a cap on the repayment total. If you’re considering this type of funding, check to see if there’s a cap on the total amount that can be required as payment.

  • The total a student can request may be limited based on that student’s other financial obligations.

For more information about income-sharing agreements, check the following sources:

Getting a Student Loan with Collateral from a Future Job:

How Income Share Agreements Could Play a Role in Higher Ed Financing

9 Things to Know about Income Share Agreements

Income Sharing Agreements Could Help Fix the Student Loan Crisis

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