Students watching the COVID-19 pandemic unfold have reason to be wary of taking additional loans for college. With what could be a slow economic recovery, signing up for an extra bill every month, no matter what, might seem like a bad idea.
Federal student loan payments are currently on hold. But those refunds are expected to resume next year before current students can take advantage of the shutdown. And while income-based repayment plans and government forbearance can provide respite from economic hardship, interest continues to accrue. Private loans are even less forgiving and almost always require a co-signer.
But an alternative emerges: revenue sharing agreements, or ISAs. With these deals, students borrow money from their school or a third-party provider and repay a fixed percentage of their future income for a predetermined period after leaving school.
Depending on the terms of the agreement and the student’s post-graduation salary, the total repaid could be much more or much less than the amount borrowed. It is a gamble that could be worth it for students who have exhausted federal grants and scholarships. Here’s why.
NO COSIGNANT REQUIRED
Most students need a co-signer to qualify for private student loans. Co-signers are held responsible for any missed payments, and a large balance can be a burden on their credit report. As families seek to make ends meet, they may need this borrowing leverage for themselves.
Revenue sharing agreements are without a co-signer. Instead of credit history, students typically get an ISA based on their year of study and major. The best deal is often reserved for high-income majors near graduation, such as seniors studying STEM fields. But high incomes may also have to repay a larger amount.
If a revenue sharing arrangement isn’t right for you and you need additional funding without a co-signer, consider a private student loan designed for independent students. These loans are often based on your income potential and do not require co-signers. They may also offer flexible repayment options based on salary or career length.
CHMAGE SAFETY NET
With a revenue sharing agreement, if you are unemployed – or if your salary falls below a certain threshold, which can be as low as $ 20,000 or as high as $ 40,000 – you don’t make any payments. . No interest accumulates and the term of your contract does not change.
This makes these deals an option for students in times of economic uncertainty, said Ken Ruggiero, president and CEO of consumer finance company Goal Structured Solutions, which is the parent company of student loan providers Ascent and Skills Fund and provides funding for school ISAs. .
“I like the idea of not having to make a payment when you enter a recession or right after a recovery,” he says.
If you are a junior, senior, or graduate student ready to enter the workforce soon, it could make a revenue sharing deal more appealing. Tess Michaels, CEO of revenue sharing deal provider Stride Funding, says she has seen a significant increase in inquiries since the pandemic forced schools to close in March.
But first-year and second-year students have more time to wait for the economic spinoffs. If you’re a long way from the start of your career, weigh the recession benefits of a revenue sharing agreement versus the risk of giving up a percentage of your future earnings. Remember, you won’t know the full cost of an ISA when you sign up.
BUT THIS IS NOT GOOD FOR ALL STUDENTS
Some colleges offer revenue sharing agreements to all students, regardless of their major or seniority. Yet many of these programs prioritize students in the upper grades, making it more difficult to qualify first-year and sophomore students.
But a revenue sharing deal might be the wrong move, even if you’re graduating soon. If your income is above average after you graduate, you could be paying a lot more than what you got.
Let’s say you get $ 15,000 from a private ISA company and agree to pay 9% of your salary for five years. If you earn $ 51,000 per year (the average starting salary of a university graduate) during your tenure, you will repay $ 22,950. This equates to an interest rate of 10.6%. In this case, a private student loan might be a better option. Fixed rates hover around 4%, although independent students will likely pay more.
Income-sharing agreements offer less protections to borrowers than student loans. Tariq Habash, head of investigations at the Student Borrower Protection Center, says that although consumer protection laws apply to these agreements, “ISA providers will say there is no real legal clarity because they are new and different “. He said he had seen the same with payday loans and was concerned that ISAs would benefit the most vulnerable students.
This article was provided to The Associated Press by the NerdWallet personal finance website. Cecilia Clark is a writer at NerdWallet. Email: [email protected]
NerdWallet: How to Get a College Income Sharing Agreement http://bit.ly/nerdwallet- Income-share