(The author is a Reuters contributor. The opinions expressed
are her own.)
By Reyna Gobel
New York Dec 12 Alex Jasiulek tapped a new
funding option known as an income share agreement to help pay
for an Ivy League education.
Jasiulek faced a $5,000 shortfall after he maxed out on
federal student loans along with grants that covered
three-quarters of Columbia University's annual tuition. To cover
the gap, he was offered an income share agreement (ISA), a plan
where individuals invest in a student's education in exchange
for a percentage of the student's future income. It is a common
practice that many schools now participate in to reduce
financial aid based on private scholarships received.
"I was 18-years-old with no credit," Jasiulek said. "My
parents refused to get parent loans or cosign private loans."
ISA agreements do not require a credit check and are meant
to fill in gaps after federal student loans are exhausted. But
income share agreements are not just for when you have no other
choice. The payments may be less than on a private loan or loans
the federal government issues directly to parents called PLUS
Parent PLUS interest rates are not subsidized by the
government. They are currently issued at a 6.3 percent interest
rate, while federal student loans generally have a rate that is
half that amount.
ISAs may be available directly through a college, through a
nonprofit, or through individual investment firms. Students at
schools that do not offer ISAs directly can search the internet
for potential lenders.
Jasiulek ended up borrowing $20,000 over four years through
an ISA provided by investment firm Lumni to pay for an
international policy degree. He will pay 5.73 percent of his
income for 10 years. His current monthly payment is $160 with an
income of around $45,000.
By contrast, if Jasiulek took a private student loans with a
4 percent interest rate, his payment would have been around $200
per month. And parent PLUS loan payments would have amounted to
a monthly payment of $220 to pay the balance off in 10 years.
The catch? If Jasiulek's income rises to $60,000, his
payment on an ISA will increase to nearly $290 per month.
Profit made by firms providing ISAs can be reinvested in
future students. Jasiulek is not worried about a potential
payment increase because he likes the idea of contributing to a
future student's education, while boosting his own bottom-line.
But there is a point where payments on ISAs and student
loans can become burdensome. Students generally should not
borrow an amount that would equal more than 15 percent of their
potential income, says Miguel Palacios, who is co-founder of
Each of the 9,000 students Lumni has invested in were able
to borrow based on the potential income for their major. English
majors would likely qualify for less than computer engineering
majors. This system works so the investor can make something
from investing the money "without creating an undue burden on
the student," said Palacios, who is also an assistant professor
at Vanderbilt University.
Each income share agreement may not only charge a different
percentage of future income, but could have different rules on
whether the percentage can rise. Make sure you do not see the
words "terms and conditions may change," recommends Lynnette
Khalfani-Cox, author of "College Secrets: How to Save Money, Cut
College Costs and Graduate Debt Free."
(Editing by Andrew Hay)