To help students understand ISAs, we've created this glossary of the key terms in every ISA agreement. On an ISA, you pay a fixed share of your income over a set period of time instead of paying upfront or using debt. Unlike with a loan, with an ISA, your payments will vary based on your income: make less, and you’ll pay less; make more, and you’ll pay more. ISAs were created to prevent unsustainable debt (large monthly payments, low salary) and to align incentives between schools and students.
Here are the key terms to review when considering any ISA:
Income-share: The income share is the percentage of income that you’re responsible for paying on a monthly basis. Most programs offering ISAs ask for anywhere from 8% to 25% of income. Crucially, this is a share of income rather than salary, meaning you’re responsible for paying a share of any bonus or contractor payments as well as salary income. This is also a share of pre-tax income, so students should budget accordingly. Individuals paying on an ISA are expected to report changes in income to the ISA servicing company (though they generally verify income annually using tax returns).
Term: The term is the duration that you’re responsible for making payments. Most programs today offer terms that last anywhere from two years up to eight years. Every month that a student makes a payment, the remaining term goes down by one month.
Minimum income threshold: Education providers don’t want to issue ISAs that students can’t afford to pay. As a result, most put a minimum income below which students don’t have to make payments. These range from $30,000 up to $50,000. Payment cap: Schools provide some protection to students who are extraordinarily successful from making unreasonably large payments. Generally these caps range from 1.5x - 2x the tuition amount.
Grace period: Most programs offer a grace period of at least 2-3 months after the end of a program before ISA payments would begin. This period gives everyone some time to start their job search without worrying about ISA payments or having to report on income immediately.
Deferment period: If a student remains below the minimum income after the grace period, the ISA is considered to be in a deferment status, meaning students don’t make payments and the term of the ISA doesn’t yet start (analogous to deferment in student debt). Typically ISAs come with maximum deferment periods of 1 to 3 years. During any deferment period, students make no payments, but the remaining number of monthly payments is not getting shorter. If a student remains below the minimum income threshold for the maximum deferment period, then the remaining term begins to get shorter. For example, let’s say a student completes a program paid for using an ISA with a 2-year term and a 2-year deferment period. If that student then has an income below the minimum threshold, first the 2-year deferment period will pass, and then the 2-year term itself would pass, at which point the ISA contract would be considered completed.
Refunds: Since ISAs result in a variable amount owed based on income, refunds work using either term reduction (pay for fewer months) or income-share reduction (pay a smaller % of income). With term reduction refunds, individuals are responsible for the same income-share, but for a reduced number of months. For example, if a person is owed a 50% refund on a 36 month, 10% income-share ISA, the person would only be responsible for an 18-month term. With income-share reduction, the share of income is reduced proportionately. With that same example of a 50% refund, the term would remain the same, but the income-share would be cut in half to 5%.
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