Income Sharing Agreement UK: Everything You Need to Know
As the cost of higher education continues to rise, students and graduates are increasingly turning to alternative forms of financing. One such alternative is the Income Sharing Agreement (ISA), which has gained popularity in the US and is slowly making its way to the UK.
So, what exactly is an ISA? And how does it work in the UK? Let’s take a closer look.
What is an Income Sharing Agreement?
An ISA is a financial agreement in which a student receives funding for their education from an investor, in exchange for a percentage of their future income for a set period of time after graduation. Unlike traditional loans, ISAs do not accrue interest and do not require repayment until the student begins earning a certain minimum income.
The idea behind ISAs is that investors are betting on the future earning potential of the student. If the student is successful in their career, the investor stands to earn a return on their investment. If the student struggles to find work or earn a high income, the investor may not receive their full investment back.
ISAs have become popular with students who may have difficulty securing traditional loans or who do not want to be burdened with student debt after graduation. They offer a potential solution to the problem of rising student debt and the difficulties that can come with repaying it.
How does an ISA work in the UK?
ISAs are still a relatively new concept in the UK, but there are a few organisations that offer them. The terms and conditions of ISAs can vary depending on the provider, but generally, they work as follows:
– A student applies for an ISA from a provider, who performs an assessment of the student’s potential future earnings based on their course of study and career prospects.
– If the student is approved, they receive funding for their education in exchange for a percentage of their future income for a set period of time (usually between 5 and 10 years) after graduation.
– The percentage of income that the student is required to pay back may vary, but it is typically between 5% and 15%.
– The student does not have to begin repaying the ISA until they earn a minimum income, which is set by the provider (usually around £20,000 per year).
– Once the student begins earning above the minimum income threshold, they are required to pay back the agreed-upon percentage of their income for the set period of time.
– The student’s payments are capped at a certain amount, so if they earn a very high income, they will not have to pay back more than the agreed-upon cap.
Pros and Cons of ISAs
As with any financial product, there are both pros and cons to ISAs.
Pros:
– No interest: Unlike traditional loans, ISAs do not accrue interest, which means that the student will not end up paying more than they borrowed.
– No repayments until income threshold is met: Students do not have to worry about making repayments until they begin earning a certain minimum income.
– Potential for lower payments: If a student does not earn a high income, they may end up paying less than they would have with a traditional loan.
– No impact on credit score: ISAs are not considered loans and therefore do not impact a student’s credit score.
Cons:
– Limited availability: ISAs are still a relatively new concept in the UK and are not widely available.
– Future income uncertainty: The student may end up paying back more than they would have with a traditional loan if they end up earning a high income.
– Limited flexibility: Once the terms of the ISA are agreed upon, the student is locked into them for the set period of time.
– Potential for higher payments: If a student earns a very high income, they may end up paying back more than they would have with a traditional loan.
In conclusion, ISAs offer a potential alternative to traditional student loans by allowing students to finance their education without accruing interest or making repayments until they begin earning a minimum income. However, ISAs are not yet widely available in the UK and do come with some potential drawbacks, such as limited flexibility and uncertainty about future income. As with any financial product, students should carefully consider their options before committing to an ISA.