Income Share Agreement

An Income Share Agreement (or ISA) is a United States financial structure in which an individual or organization gives a fixed amount of money to a recipient who, in exchange, agrees to pay back a percentage of his/her income for a fixed number of years. ISAs have gained prominence as a proposed alternative to the traditional student loan system in American higher education, and a number of private companies now offer ISAs for a variety of purposes, including as a funding source for college tuition. ISAs are often considered to be less financially risky to a borrower than a traditional private student loan.

All Income Share Agreements involve an investor transferring funds to an individual in exchange for a fixed percentage of his/her future income for a fixed period of time. Other features of Income Share Agreements could include a) an income exemption where the borrower does not owe anything below a certain income, and b) a buyout option, where the borrower pays a fee to exit the contract early. Some ISA investors offer different terms to different student based on their predicted likelihood of success, while others offer the same terms to all students. Potential groups of investors could include for-profit companies, altruistic non-profits, alumni groups, educational institutions, and local, state, or federal governments.

Milton Friedman originally proposed the concept in 1955, in his essay The Role of Government in Education, in which he argued that students should be funded through an "equity investment" such that:

[Investors] could "buy" a share in an individual’s earning prospects: to advance him the funds needed to finance his training on condition that he agree to pay the lender a specified fraction of his future earnings. In this way, a lender would get back more than his initial investment from relatively successful individuals, which would compensate for the failure to recoup his original investment from the unsuccessful.

In the 1970s Yale University attempted a modified form of Friedman’s proposal with several cohorts of undergraduate students. At Yale, instead of making individual contracts for a fixed number of years, all members of the cohort agreed to pay back a percentage of earnings until the entire cohort’s balance had been paid off. However, the system left students frustrated that they were paying more than their fair share, by being forced to make payments on behalf of peers unwilling or unable to pay back their loans.

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