An Income Sharing Agreement, or ISA, is an alternative way for students to pay for university. Traditionally, students take out loans and take all the risk. If a student graduates from college with no job or a low-paying job, a university isn’t going to make up the difference.
This asymmetric risk profile is one of the reasons why I’ve been imploring people to attend a more affordable college. If you’re not already rich or don’t receive free grant money due to your genius, please don’t overpay for college. Further, be smart about picking a major in high demand.
Unfortunately, with the overall student loan debt amount ballooning to ~$1.6 trillion in 2020, I don’t think many people are paying attention. Good thing there’s an alternative to taking out student loans in the form of an Income Sharing Agreement.
Instead of taking out a student loan at a potentially high interest rate, with an ISA, a student agrees to pay a fixed percentage of their earnings for a fixed number of months.
In a typical ISA, students would agree to pay a fixed percentage of their income once they are employed and are earning in excess of a specified threshold salary. This threshold is usually $30,000 – $40,000, depending on the ISA.
An ISA is quite different from student loans, which accrue interest during college and regardless if the student finds a job or not. Further, student loan payments generally have at most a 6-month moratorium after graduation before payments are due.
It seems to me the an ISA is a win for the student and a win for the investor. Therefore, I’ve invited Edly, an ISA investment platform to write a sponsored post and share further insights about this fast-growing asset class.
The Founders Of Edly
Edly focuses on high potential students from the top programs and schools across the country. Here’s a quick bio of the two founders.
Christopher Ricciardi, CFA
Edly CEO, Christopher Ricciardi is currently the Treasurer and Director of the American Fund for the London School of Economics and has held this position since 2010. In addition, he was former CEO of Cohen and Company as well as the former Global Head of Structured Credit Products at Merrill Lynch.
Rounding out his financial background is his former position as the head of US Structured Credit Products at Credit Suisse.
Edly President Charles Trafton’s recent investing history involved a partnership at FlowPoint Capital and FlowPoint Education Management. He was also a former portfolio manager at The Boston Company Asset Management and was voted by Institutional Investor magazine as an “All-American Research Analyst” at Canaccord Genuity (formally Adams, Harkness, and Hill).
Challenging The Traditional Student Loan Model
With students struggling to meet their student loan payments, especially during the current pandemic, Edly has introduced a new approach. Before we reveal the new idea, let’s review some disappointing statistics about student loan debt.
- The total outstanding student loan debt is roughly $1.6 trillion, up from $1.48 trillion in 2019, and $1.37 trillion in 2017.
- According to the United States Government Accountability Office, 19,321 student have submitted applications to have their student loans forgiven under the Public Student Loan Forgiveness program. However, only 55 or 0.28% of those applications were approved.
- According to the Consumer Financial Protection Bureau, over three million seniors over the age of 60 are still paying off their student loans.
- The price of college has increased 8X faster than the growth of wages since 1980. The average cost of tuition for public universities increased from $3,190 to $9,970 since 1980. Private universities have also seen a similar increase over the past 40 years. Private school tuition has increased from $15,160 to $34,740.
- American owe about $521 billion more on student loans than they do on credit card debt.
Here are five problems with private student loans.
1) Traditional Private Student Loan Inflexibility
Traditional private student loans are limited in their flexibility. Contracts are written with fixed monthly payment amounts to include the amount of interest paid. These payments are required regardless of whether the student has a job or how much they earn.
2) Traditional Interest Payments
If students miss a monthly payment, regardless of their current income or job placement, their debt can continue to accrue and compound. This compounding interest can often cripple the student’s ability to pay their loans off in a timely manner.
3) Traditional Maximum Repayments
With a traditional student loan, there is no defined maximum payment amount. Due to unforeseen circumstances, students are often unable to pay their monthly bills, which results in outstanding debt quickly compounding. The result is a repayment amount much more significant than initially borrowed.
4) Traditional Private Student Loan Credit Checks
A student’s previous credit history, FICO score, and the requirement for co-signers greatly reduce Americans’ ability to secure a student loan. Also, these factors contribute heavily to the offered interest rate, which can make student loans unaffordable to repay.
5) Student Loan Contract Term Limits
Traditional student loans often have decades-long repayment terms, which can be extended to include unlimited repayment amounts. These loan contracts favor the lender and negatively affect students’ access to education and financial security.
Edly’s New Student Loan Solution
Edly designs Income Share Agreements (ISAs) to help students save money on their education by bypassing the archaic traditional student loan model. Here’s how Edly’s ISAs work.
Repayments Designed Around Each Student
With Edly’s model, students pay a fixed amount of their income to pay back Edly’s loan. Students are required to pay back the loan each month on two conditions:
- They are currently employed
- They make more than a pre-set minimum income threshold
The total payments are made over a predetermined fixed payment term and are designed to meet the needs of the student. Repayment percentages are meant to be affordable and flexible.
Flexibility – Repayment amounts continually adjust to different income levels. Depending on promotions or layoffs, Edly’s repayment plan adjusts with the student’s ability to pay.
If a student is unable to repay due to job loss or earning below the minimum income threshold, repayments are paused.
Loans Are Capped
Edly’s model does not allow for interest to accrue like the traditional student loan model. Before accepting an Edly ISA, students know the maximum amount they will repay over the life of the loan.
This cap not only saves students money, but it gives a clear picture of how a student can map out their financial future.
*Capped amounts are usually around 1.5-2 times the ISA amount.
No Interest Accrual – Because repayments are based on a fixed percentage of graduates’ income, students will never be in a position to repay more than what they can afford due to ballooning interest payments.
Save Money With Flexibility
Repayment is directly related to the student’s income upon graduation. Depending on how much money a student makes, the total amount the student will repay over the term of Edly’s Income Share Agreement will vary. Some students will pay less than the total payment cap, and others will repay less than what they borrowed!
Fixed Repayment Term – Because students are required to repay a portion of their income while they are employed, and if they make more than the minimum income threshold, a fixed-term limit is attractive. Once a student reaches the end of the predetermined life of the loan, future payments are no longer required.
*Contract terms range from 24 – 120 months
Repayment Terms Based On Education – Unlike traditional loans, Edly does not base the repayment Income Share Agreement details on the student’s credit history. ISA terms are based on historical school data for the degree the student is seeking.
How Edly Works – For Students
Edly believes students should focus on their education and not stress about their ability to pay for it. Because of this, their onboarding process is simple and straightforward.
1. Apply For Eligibility
Students can discover if they are eligible for Edly funding in less than one minute. By filling out a short application form that is not reliant on a credit check, students can see if their educational aspirations match what Edly investors are looking for.
2. Approval Process
If students pass the initial screening process, Edly sets each student up with their personal account servicer who will go over contract terms agreements.
3. Paying For Tuition
When an Income Share Agreement is completed, Edly pays the school directly. Students are not involved in the tuition payment process.
4. Focusing On Education
Edly encourages students to focus on their education rather than worrying about their finances. While attending school, no repayment is required, and interest does not accrue.
5. Use Education To Land A Great Job
Upon graduation and when the student becomes employed, students are required to start making payments back to Edly. Payments are only required if their job makes them more than the defined minimum, which is typically around $30,000 – $40,000 a year, depending on the school, area of study, and location.
The payments required will vary and are entirely dependent on the income of the student. The less a student makes, the less payment is required. The more the student makes, the larger the payment.
6. Job Loss And Repayment
Because ISA payments are directly connected to income, job loss, or a reduction in wages will reduce or put Edly repayments on hold.
Here’s a video highlighting how Purdue University decided to launch Income Share Agreements to help its students pay for college. Essentially, a student sells a stake in themselves to investors. And investors make a bet that its students will succeed after college. Therefore, choosing the right student, the right major, and the right college is important.
How Edly Works – For Investors
The capital used to pay for a student’s education comes directly from investors. By being paid a percentage of students’ future earnings, it’s important for Edly only to accept the most qualified students.
1. School Screening
Not every student who applies for Edly is approved. Edly’s diverse team heavily screens school programs and invests in only the top performing programs – those with proven track records of providing students with positive career outcomes.
2. Legal Binding Documents (Income Share Agreements)
To safeguard the assets of investors, Edly authors Income Share Agreements with only the most qualified students who agree to sign a contract to repay a percentage of their salary after graduation.
3. Options For Investors
As an investor, you are currently given two different ways to invest with Edly:
- Edly manages an account known as EdlyOutcomes I, High Yield which directs investment opportunities they believe to be the most profitable based on students and programs. The target return on this strategy is currently 14% (IRR).
- Edly also offers the same portfolio of investments but wraps them in a principal protected strategy using U.S. Treasury STRIPS in EdlyOutcomes I, Principal Protected. Because of the lower risk, the target return on this strategy is currently 8%.
4. Monthly Return On Investment
Payments are provided to investors on the 25th of each month.
5. Constant Communication
Edly compiles investment performance and provides this information to investors at regular intervals.
Edly’s Fee Structure
Direct fees for EdlyOutcomes I, High Yield include:
- 1% per year for two years of base management fee and
- 4% of the cash flows received by the investors on the ISA portfolio
Direct fees for Edly Outcomes I, Principal Protected include:
- .5% base management fee for one year
- 2% management fee of ISA cash flows
- 1% of Treasury STRIPS cash flows
Edly’s Target Return
Edly’s business model targets a 14% return to investors NET of ALL fees for the Edly Outcomes I, High Yield Strategy.
Edly targets an 8% target return with the principal-protected note, using US Government Bonds.
These returns are paid to investors on the 25th of each month, and investors will receive a 1099 tax form for each year they receive returns.
Edly’s Actual Return To Investors
Edly reports historical data from their ISA’s and reports a historical return to investors of 16.57%. This return is without principal protection. Edly has funded over 2,500 students to date.
Target Portfolio Composition
Currently, Edly’s target portfolio is made up of the following career fields:
- Technology and Engineering – 50%
- Nursing – 25%
- Business – 15%
- Industrial Vocational – 10%
Changing The Way Students Afford Education
Edly is a nontraditional way to invest and pay for traditional educational opportunities. By adding Edly ISAs to your portfolio, you can add diversification to your investment strategy with monthly cashflows and short maturities on your assets.
In summary, we believe there are three primary benefits of investing in Income Sharing Agreements (ISAs):
- Attractive potential returns of 8% – 14%
- Help students avoid burdensome student loans and increase college affordability
- Greater access to education financing and help fund education for underrepresented groups. Unlike traditional private student loans, Edly does not require credit scores or co-signers.
To find out more about Edly, visit them at Edly.co.