LDN - Business

Your Money: How to bet on future income to pay for college now

[December 13, 2016] By Reyna Gobel

New York (Reuters) - Alex Jasiulek tapped a new funding option known as an income share agreement to help pay for an Ivy League education.

Jasiulek faced a $5,000 shortfall after he maxed out on federal student loans along with grants that covered three-quarters of Columbia University's annual tuition. To cover the gap, he was offered an income share agreement (ISA), a plan where individuals invest in a student’s education in exchange for a percentage of the student's future income. It is a common practice that many schools now participate in to reduce financial aid based on private scholarships received.

“I was 18-years-old with no credit,” Jasiulek said. “My parents refused to get parent loans or cosign private loans.”

ISA agreements do not require a credit check and are meant to fill in gaps after federal student loans are exhausted. But income share agreements are not just for when you have no other choice. The payments may be less than on a private loan or loans the federal government issues directly to parents called PLUS loans.

Parent PLUS interest rates are not subsidized by the government. They are currently issued at a 6.3 percent interest rate, while federal student loans generally have a rate that is half that amount.

ISAs may be available directly through a college, through a nonprofit, or through individual investment firms. Students at schools that do not offer ISAs directly can search the internet for potential lenders.

Jasiulek ended up borrowing $20,000 over four years through an ISA provided by investment firm Lumni to pay for an international policy degree. He will pay 5.73 percent of his income for 10 years. His current monthly payment is $160 with an income of around $45,000.

By contrast, if Jasiulek took a private student loans with a 4 percent interest rate, his payment would have been around $200 per month. And parent PLUS loan payments would have amounted to a monthly payment of $220 to pay the balance off in 10 years.

The catch? If Jasiulek’s income rises to $60,000, his payment on an ISA will increase to nearly $290 per month.

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Graduating students attend USC's Commencement Ceremony at the University of Southern California in Los Angeles, California, May 15, 2015. REUTERS/Mario Anzuoni

RISING INCOMES

Profit made by firms providing ISAs can be reinvested in future students. Jasiulek is not worried about a potential payment increase because he likes the idea of contributing to a future student’s education, while boosting his own bottom-line.

But there is a point where payments on ISAs and student loans can become burdensome. Students generally should not borrow an amount that would equal more than 15 percent of their potential income, says Miguel Palacios, who is co-founder of Lumni.

Each of the 9,000 students Lumni has invested in were able to borrow based on the potential income for their major. English majors would likely qualify for less than computer engineering majors. This system works so the investor can make something from investing the money “without creating an undue burden on the student,” said Palacios, who is also an assistant professor at Vanderbilt University.

Each income share agreement may not only charge a different percentage of future income, but could have different rules on whether the percentage can rise. Make sure you do not see the words “terms and conditions may change,” recommends Lynnette Khalfani-Cox, author of “College Secrets: How to Save Money, Cut College Costs and Graduate Debt Free.”

(The author is a Reuters contributor. The opinions expressed are her own.)

(Editing by Andrew Hay)

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