New college financing option is based on projected income

How to pay for college is the sixty-four thousand dollar question. Recently, there’s talk about a new option called income-share agreements.

They are similar to the government’s income-based loan repayment plans. Students promise to pay a fixed percentage of their future income in exchange for money for college.

Federal income-based repayment plans usually are set up after graduation, and range between 10 and 20 percent of a borrower’s discretionary income. Unlike those plans, ISA terms are set in advance, based on income projections made on the basis of a student’s field of study and school, explains Brianna McGurran, a student loan expert at NerdWallet.com.

What’s the upside? “No interest, no balance, affordable payments, and you can’t go into default like traditional loans,” says Kristen Moon, a college counselor and founder of MoonPrep.com in Bellmore. “ISAs appear to be a good second option.”

Though ISAs are not widely available, they are worth considering. With a 10-year repayment term, ISAs can be a better option than federal Parent PLUS loans, private or refinanced loans for high earners, if they only have to pay back 3 percent of their income, says McGurran. ISAs can also be attractive for students projected to earn lower incomes, if they have payback terms of 3 to 5 percent of future income.

The downside:“Terms vary for each ISA; be clear about the terms,” says Moon.

Borrowers who are successful in their careers may end up paying back more under an income share agreement than with a traditional loan, since their payment increases with increasing income, points out Mark Kantrowitz, publisher of college strategy website Cappex.com.

The bottom line, says McGurran: ISAs are worth a look as “a complement to federal student loans, but not a replacement.”