What Is an Income Share Agreement (ISA)?

An Income Share Agreement (ISA) offers an alternative approach to financing, primarily within the context of education and vocational training. This model connects a recipient’s repayment obligation directly to their future earnings. Unlike traditional loans that require fixed payments regardless of income, an ISA adjusts repayment amounts based on what the individual earns after completing their program. The purpose is to provide funding that aligns with the recipient’s future earning capacity, offering an alternative to conventional debt.

Defining an Income Share Agreement

An Income Share Agreement is a contractual arrangement where an individual receives financial resources in exchange for a commitment to pay a predetermined percentage of their gross earned income for a specified duration. This funding is commonly used for educational expenses, such as tuition or vocational training costs. A fundamental distinction from traditional loans is the absence of a fixed principal amount to be repaid, and interest does not accrue on the disbursed funds. Instead, the total repayment amount dynamically adjusts with the recipient’s income.

This mechanism provides a measure of financial protection, as repayments are directly linked to the individual’s ability to earn. The repayment amount fluctuates, meaning higher income results in larger payments, while lower income leads to smaller payments or no payments at all. This design aims to create a shared risk model between the funding provider and the recipient.

Key Elements of an ISA

Several specific financial and structural terms define an Income Share Agreement, dictating the nature of the financial commitment. The income share percentage is a fixed portion of the recipient’s gross income that they agree to pay, typically ranging from 2% to 10% for college ISAs and 8% to 25% for vocational programs like coding bootcamps. This percentage applies to all earned income above a certain level.

A payment cap sets the maximum total amount a recipient will ever repay, regardless of their earnings. This cap is often expressed as a multiple of the original funding received, commonly ranging from 1.5 times to 2 times the initial amount. This feature protects recipients from excessive repayment if their income significantly exceeds expectations. The payment window, or term, specifies the maximum duration, typically between two to ten years, over which payments can be collected. Payments cease once this period ends, even if the payment cap has not been met.

Another element is the minimum income threshold, which is an income level below which the recipient is not required to make payments. This threshold commonly falls between $30,000 and $50,000 annually. Should a recipient’s income drop below this amount, payments are paused. Many agreements include deferment or forbearance provisions, allowing for the temporary suspension of payments during periods of unemployment or when income remains below the specified threshold. These terms collectively outline the financial structure and risk-sharing aspects inherent in an ISA.

How an ISA Operates

An Income Share Agreement begins with a formal agreement and funding disbursement. Once the terms are mutually accepted, the ISA provider disburses the agreed-upon funds directly to the recipient or, in the case of educational ISAs, directly to the institution. The agreement outlines the specific financial obligations and the conditions under which repayment will commence.

Following the completion of the funded program and typically after a grace period, the process of income verification begins. ISA providers regularly verify the recipient’s gross earned income, often requiring documentation such as tax returns, pay stubs, or bank statements. Some providers may also integrate with payroll systems or utilize services like the IRS Income Verification Express Service (IVES) to confirm earnings. This ongoing verification ensures accurate calculation of payment obligations.

Monthly payments are calculated based on the verified income and the agreed-upon income share percentage. Payments are typically collected through automated deductions or direct payments from the recipient’s bank account. This systematic collection continues until the recipient reaches the predetermined payment cap or the maximum payment window expires. Payments also pause automatically if the recipient’s income falls below the minimum threshold, resuming when income rises above that level.

Parties to an ISA

Distinct parties are involved in an Income Share Agreement, each with specific roles. The ISA recipient is the individual who receives the funding and commits to sharing a portion of their future income. Their primary responsibilities include diligently pursuing their education or training, actively seeking employment after completion, accurately reporting their income, and making timely payments once their earnings meet the specified threshold.

The ISA provider or investor is the entity that supplies the capital for the agreement. This can be a dedicated ISA company, a university directly offering ISAs to its students, or a private investment group. These providers are responsible for structuring the terms of the agreement, disbursing the funds, monitoring recipient income, and collecting repayments. Their financial return is directly tied to the future earning success of the recipients.

In many cases, an educational institution also plays a role, particularly when the ISA is used for tuition or program costs. While the institution may not always be the direct ISA provider, they often facilitate the agreement, partner with providers, or integrate ISAs into their financial aid offerings. Their involvement helps connect students with funding opportunities, and they may provide support services that contribute to the recipient’s career success, indirectly benefiting the ISA provider.