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 ~$1.8 trillion in 2022, 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.
Charles Trafton
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%.Â
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.
Very nice article Sam! In the future when you do reviews like this PLEASE mention right up from t that they are for accredited investors only. This would be extremely helpful to know.
Thx!
Has Edly factored current political movements for free tuition and elimination of college loan debt in case of Democrat victories in November?
I’m curious how Edly is navigating the pandemic, and to what extent changing preferences for college, remote learning and significant financial pressure on schools impact the asset class. I understand the concept in a normalized environment, but investing in an ISA pool vintage under current conditions seems challenging.
I have to agree with another commenter here about how something smells off.
Just intuitively thinking about this investment model, it seems bad for the investors. By the business model itself, only sub-par future earners will sign up for the program (otherwise, who wants to bet against themselves). If outperformers sign up, then it is because they don’t quite understand how this model works and they will be paying more than a traditional student loan.
Otherwise, I can’t see anyone generating income in excess of the average college student loan interest of under 6%. My gut tells me that the actual return over time would be lower than that 6% (b/c only attracts underperformers and need to do better than interest on college debt as student debt is another form of competition for funding of tuition) unless there are subsidies by the government or the company that is not being disclosed above. My guess after fees charged by the company, it will be around break even or negative for investors.
I might be missing something here but would welcome additional color from Edly.
You’re referring to “adverse selection” which we have not experienced to date. Purdue professor wrote a paper on it here based on the Purdue Back-a-Boiler ISA program https://www.krannert.purdue.edu/faculty/kjmumfor/papers/Mumford%20Income%20Share%20Agreement%20Selection.pdf
Re: “average student loan interest rate of less than 6%”, that is indeed the rate for federal student loans. Edly ISAs generally do not compete with taxpayer-funded government loans. We compete with private student loans which range from single-digit rates to as high as 18%, even for seniors with parental co-signers.
We target 12-14% IRR for our programs, and our results to-date have been slightly higher. We believe this is because we underwrite programs that prepare students for labor markets with significant supply-demand imbalances like computer science and nursing. Granted, it is early days for this new asset class and past performance is not a guarantee of future results.
I bet Edly also negotiates with the school to get better bulk pricing, which also helps them achieve better returns
Correct Chris. Edly creates ISA contracts two ways:
1.) Edly contracts with schools directly to invest in the tuition at a discount to face value, with schools co-investing in the ISA pools. This creates incentive alignment between schools, students and our investors.
2,) Edly contracts directly with students. This form is most typical with non-profit schools like universities.
Am I the first to smell something bad here? An investment that targets 14% return after fees and some fraction of students paying less than they benefited (or even paying none)? There must be an effective interest rate charged to the student on par with credit card rates! Unless this is a charity operation or there’s some other subsidy (which means it’s not really an investment), the math just doesn’t work. I wish them well because competition always benefits the consumer – but I must be missing something big if there’s really a viable business model here.
Many good thoughts in the comments, and I’d like to add another: Why is it assumed that “college” is a 4 year endeavor? Here’s a thought – look at your list of required classes. Anything that says “free elective” is a class that’s not directly related to your degree … or there would be a concrete requirement. Those classes just keep you in the system paying for things you don’t need. I graduated with an engineering degree, and there were *none* of those. We could argue about the general social sciences and humanities requirements; taking those away would have saved me a semester (18 credit hours). From what I see in other degree programs, you could significantly pare down the course requirements. The obvious argument is that a student should graduate “well rounded,” which is a worthy goal. But at the current costs of college, is it a cost-effective way to accomplish that goal?
We agree – college is not for everyone – and one of our passion projects at Edly is vocational training. Industrial skilled labor has been ignored in the U.S. for decades despite jobs such as welding, HVAC, diesel mechanics and other sectors being available and high-paying. Partly this is social (“everyone should go to college”) and partly it is systemic (there are rarely federal student loans available for vocational school).
Edly prices the ISAs so that even the most successful students would pay back (the max repayment cap) about the same as they would to a private loan. We target IRRs in the 12-14% range and to-date our results have been in-line with targets. However, as others have pointed out this market is young and this data will become self-evident in the coming years.
If you target 12-14% IRR and in the best case the student ends up paying about the same as in any alternative loan options, it means that they all have interest rates above 14% right ? What is the average student loan interest rate ?
One question I have, is related to the “cost of college” versus the tuition. It seems that Edly is focusing on paying the tuition only and directly to the college/university (unless i’m wrong here), whereas there are additional costs associated with college attendance. So, are these students going to have to take on other loans in addition to the ISA for housing, food, books, etc. anyway, or is that included in the general term tuition?
From the investor side, their sample size of 2,500 students seems rather small to boast a 14% return and having projections of growth. I suppose you need to start somewhere, but this one might be too early to tell as far as effectiveness. It’s a good goal to have, but considering in 2018 (I just picked a random year) there were 14.53 million college students enrolled in public colleges and another 5.12 million enrolled in private colleges, saying they have invested in 2,500 is hardly a dent. I’m assuming the 2,500 students came from that pool. Not exactly an industry disrupter as the buzz word seems to be.
I think there is some merit to the overall concept though. The rate of college cost increases and potential future debt issues for the next generation is problem. However, as alluded to in other comments I made on different posts, I simply don’t think that college is right for everyone. Education is important for sure, but you can get the same education with a library card/internet access. Having a skill that allows for a career is more important than a piece of paper.
So, students feeling forced to go through the motions of graduating high school and then going to college as a automatic next progression seems wrong. There are varying reports on the completion rate, or better stated the drop out rate of college students each year.
According to one report I read, the US has a drop out rate of 40% with approximately 30% of students dropping out before their sophomore year.
I’m curious on how Edley accounts for that? Sure they are reviewing candidates who seem motivated and potentially ambitious with their goals but how do they know? What happens to those students who do end up dropping out?
Similarly, students change their mindset on their future, and as a result change their majors often. How does the program work if a student was screened for Engineering, but ended up going to secondary education teaching, or philosophy or what have you? Would Edly pull their backing? The students with the standard college loans, would just apply again and take on more loans to complete the degree/classes for as long as it took. Thus they would increase the amount owed overtime and likely bury themselves in debt for a longer period of their lives. what happens in this case?
I will say the concept looks good though. Especially for students coming from families with less than. If they understood the risk/reward, and had the backing to take on a loan knowing the final payments in advance it might help their decisions and give them drive and focus to complete the degree program. I currently some student might not fully understand the life impacts when they sign on the line for various loans, which could haunt them for life if not paid back in full expeditiously.
The last question, they claim that the future jobs need to be in the $30k-40k range to support a repayment plan, however from their sample majors they are showing all of the jobs are compensated significantly higher. Are they really backing majors such as teaching, or perhaps social workers that would likely fall in the $30-$40k range (initially), or is that just an advertising gimmick? They are really just after STEM degrees, and those with more likely stable high salary career potential.
Thanks for these thoughtful comments.
The college completion rate in the U.S. is woefully low, roughly 55% of all entering freshman will graduate within 6 years. Of course there is a range from Princeton at 98% on down to shamefully low figures. You can see these stats by school at the Dept of Education’s College Scorecard site. Here is a sample link to my alma mater Boston College, where the school reports graduation rate, avg debt/student, avg salary by major and other helpful information for students and their families when evaluating opportunties. https://collegescorecard.ed.gov/school/?164924-Boston-College
Edly tracks and ranks every school in the U.S. on these measures including student loan default rate by cohort which you can also find here https://nslds.ed.gov/nslds/nslds_SA/defaultmanagement/search_cohortCY2016.cfm
I would add that for undergrads, Edly only offers ISAs to incoming seniors, and for grad students, those that are within 18 months of receiving their Master’s.
Fascinating. I’ve never heard of ISAs before. Impressive list of schools above too. I like the out of the box approach that ISAs present to students. And that’s interesting there’s the opportunity as investors as well. I like how Edly takes care of paying the school tuition directly to the universities.
Long time reader, first time commenter. Hi Sam.
ISA is also very common in coding bootcamp, which I’m about to take one.
On the flip side, who would be a ideal person to use ISA to pay for their education?
What do they have to consider about?
Interesting model. Seems like a platform like RE crowd sourcing. They have to build a book first (front the money) and then wait a minimum four years before the first dollar of return trickles back in. Interesting from a credit risk and time value standpoint.
Another thought / students have to be thoughtful here because Certain vocations and Jobs qualify loan forgiveness. Careful planning is key
Nonetheless interesting vehicle to consider in the mix of P2P, Agri and RE sharing platforms among others.
Most students should take as much federal student aid as possible, including federal loans and Pell grants. But there are limits to this funding, and often it will not cover the entire cost of the education (the “funding gap”). Also, many vocational schools and bootcamps are not eligible for federal loans, and the primary alternative is private student loans, which are FICO-based and hence discriminatory and regressive.
Most students should take as much federal aid as possible-it’s the cheapest and as you point out, many areas of studies may qualify for federal student loan forgiveness which is is a factor for students and their families when choosing among funding alternatives. Good article here by Experian explaining the broad strokes
https://www.experian.com/blogs/ask-experian/what-is-an-income-share-agreement/
Indeed. The Lambda School is really helping pave the wave too.
I would say the ISA is great for a student who doesn’t have rich parents, who hates debt, likes to create a partnership, and is more uncertain about his or her income and career prospects.
As you say, the ISA is more common in coding bootcamps, and that’s because investors find more certainty in coders. But not so much in History or Arts majors, for example. If you can find an ISA as a History or Arts major, you might really find it attractive since your future income power will be less certain.
The ISA’s value is also determined by the student loan interest rate. Given rates have declined, the ISA has more competition. Hence, once can calculate the potential cost of the ISA versus student loan debt and run some numbers.
You’re correct that interest rates on government debt, corporate debt, and federal student loans have declined, but that is not the case in private student loans, which is where ISAs compete. Student lenders have seen their cost of capital rise, in some cases dramatically. I talk to students every day, and we see even seniors in college, with parent co-signers that have high FICO scores, are bring quoted high-teens rates on private student loans.
Edly prices the ISAs so the that even the most successful student would pay back (the max repayment cap) about the same amount as they would to a private loan. Given the ISAs flexibility and guaranteed affordability, student often prefer the ISAs to the private loan.
Coding bootcamps have been early adopters of ISAs because most are not Title IV accredited and thus students are not eligible for federal student loans. Also, most bootcamps are short-form programs (typically 4-9 months) and target IT jobs, where unemployment is low, wages and wage inflation are high, and private student loans are regressive and expensive.
Congrats on your pending entry into a bootcamp. This is a burgeoning industry, filling the gap created by the demand for IT professionals vs. the limited supply here in the U.S. Check into your schools Outcomes Report (most post on their site), filed with their state regulator or with CIRR.org for an idea of what to expect post-graduation.
Students that opt for ISAs typically appreciate the income and employment insurance the ISA represents. Often they also do not come from wealthy families and therefore do not have parents with high FICO scores to co-sign a loan. Edly underwrites students based on their potential, not their past, and certainly not based on their parents’ wealth.