What We Know About the Income Share Agreement Market
What We Know About the Income Share Agreement Market
September 8, 2023
In this blog, JFF’s Financing the Future team summarizes recent research on income share agreements with the goal of building a more student-friendly ISA market and providing everyone with a better understanding of the ISA market as a whole.
Income share agreements are an outcome-based financing model that ties the cost of education and training to students’ salaries after graduation. As they grow in popularity as a way to finance postsecondary education, they are more frequently becoming subject to legislation and regulatory rulemaking on both the state and national levels. In order to build a more student-friendly ISA market, it is imperative that all parties involved better understand the ISA market and its composition.
In this blog, we summarize recent research on ISAs with the goal of providing a better understanding of the ISA market as a whole. We hope that this information can help philanthropic funders make funding decisions, policymakers determine whether and how to draft new regulatory structures, and journalists better understand the market that they are writing about.
#1 The ISA market is small but growing, though non-standardized terminology makes it difficult to measure with accuracy.
#2 The market is shifting toward graduate and boot camp programs, with the funding coming from third-party providers rather than school-based ISAs.
#3 Most ISAs appear to be offered in the context of non-Title IV education, where federal student loans are not available. The contract terms in those ISAs are significantly different from those offered for Title IV education.
Market Size and Composition
Stratagem estimated that the U.S. ISA market totals $32.4 million, representing nearly a quarter of the $134.2 million global market. In contrast, the RAND study notes the difficulty in precisely measuring the overall size of the ISA market because ISA providers often use non-standardized language to describe the product they are offering. This is particularly challenging because the regulatory uncertainty surrounding ISAs is causing some providers to switch to offering outcome-based loans, which replicate the features of ISAs but do so within an explicit loan framework. These are arguably de facto ISAs but would not be considered as such in a market survey.
ISAs are offered by two distinct groups of institutions in the United States: Title IV institutions (including many two- and four-year universities), whose students can receive federal financial aid, and non-Title IV institutions (including many training programs and boot camps), whose students are ineligible for federal aid. The RAND research found that non-Title IV institutions constitute the majority of ISA-offering institutions—115 out of 160 programs (72%). Only 45 ISA-offering institutions (28%) in the RAND study were Title IV institutions. However, it should be noted that even at non-Title IV institutions, ISAs are not exceptionally prevalent—Career Karma noted that ISAs are currently offered at only 23% of boot camps in the United States.
The Stratagem report found that, as of 2022, boot camps represented 64% of the U.S. and Canadian ISA market value (the report does not break out the U.S. market separately), with ISAs for undergraduate and graduate programs making up 11% and 24% of the market, respectively. This composition is similar to that of the global market.
Stratagem also found that ISAs offered by non-school finance providers (direct-to-student ISAs) make up 67.9% of the U.S. and Canadian market value, while ISAs offered by educational institutions (school-based ISAs) make up 31.8% of the market. In contrast, the Confero research found there to be more school-based ISAs (81%), with only 18% of providers contacted being direct-to-student ISAs. While the Confero results do not align with the Stratagem report, this could be due to several factors such as selection bias and research methodology (using market value of providers versus number of providers).
ISA Contract Terms
By design, ISAs have a variety of contract terms that differ from traditional student loans. One of the key elements of an ISA is that borrowers repay the loan only if their post-graduation wages exceed the income threshold designated in their contract. If they are obligated to repay, borrowers’ monthly payments are equal to a set percentage of their income, referred to as the “income share.” The financial obligation ends when a specified number of payments have been made and/or the total time period has elapsed, or if the borrower’s repayments hit a certain cap, which can be designated as a dollar amount or tied to a time-based calculation. The variety in contract terms can make ISAs either more or less student-friendly than traditional loans, so it is important for ISA providers to clearly and publicly state expected contract terms.
There is a wide range of ISA contract terms throughout the U.S. market. The results from JFF’s study with Confero align closely with RAND’s market study. RAND found that borrowers’ income shares ranged from 1.4% to 30%, with 10% being the most common percentage. Confero mystery shoppers reported income shares ranging from 8.5% to 10%. RAND found that income thresholds ranged from $12,000 to $100,000, with the most common threshold being $40,000. The income thresholds that Confero shoppers reported fall within the range of the RAND study: $40,000, $50,000, and $60,000. The RAND study reported repayment periods ranging from 14 months to 120 months, with an average of 47 months. The ISAs surveyed by the Confero shoppers featured repayment periods from 48 months to 84 months.
RAND found that most of the variation in contract terms—especially income percentage and repayment term—was due to institution type (Title IV versus non-Title IV). ISAs offered by Title IV institutions (federally accredited universities) tended to have lower income shares, lower income thresholds, longer repayment terms, and a wider range of repayment caps. Non-Title IV institutions (non-accredited institutions, including boot camps) tended to have higher income shares, higher income thresholds, shorter repayment terms, and a smaller range of repayment caps. Career Karma found that many boot camps that offer ISAs have high repayment caps and income share rates.
Current Trends in the ISA Market
The Stratagem report estimates that the global ISA market grew at an average 4.6% annual rate between 2017 and 2022, slightly faster than the 4.5% annual rate of growth in the United States during that same time period. The Asia-Pacific and European markets grew the fastest (5.7% and 5.5%, respectively).
Stratagem projects that the ISA market will expand in every region from 2022 to 2030. The global market is projected to grow at a 5.7% annual rate from 2022 to 2030, with the United States growing at a 5.5% rate. Asia-Pacific and Europe are projected to remain the fastest-growing regions (7.0% and 6.4%, respectively). Stratagem also projects that in the U.S. and Canadian ISA market, graduate ISAs will grow the fastest, followed by boot camp ISAs and undergraduate ISAs. Direct-to-student ISAs are projected to grow slightly faster than school-based ISAs (5.9% versus 5.5%).
Stratagem identifies two drivers that will contribute to the growing usage of ISAs. First, it believes that the rising cost of education and the student loan crisis will boost demand for alternative financing options such as ISAs that promise greater affordability. Second, it believes that the emergence of success stories from ISA graduates and endorsement from respected educational institutions will spur others to follow the same path. But limited awareness and understanding among students, as well as the risk and uncertainty that ISAs pose to capital markets, threaten to stall ISA growth.
In contrast, Career Karma’s study on the growth of boot camps suggests a growing but decelerating ISA market. The number of students that boot camps graduate each year has slowed to average annual growth of 1.6%, a far cry from the COVID-era 30.3% jump in annual graduates from 2019 to 2020. Moreover, the share of boot camps that offer ISAs has fallen from 42% in 2021 to 23% today. Nonetheless, this could be because some boot camps are referring to their student financing options by a different name, such as “deferred tuition agreements.”
Each piece of research presented here, and the threads that link them, is extremely valuable for our understanding of the ISA market in the United States and beyond. This information can help journalists, lawmakers, and students better understand ISAs and aid providers and funders in better designing student- and equity-centered ISAs.
Highlighting these findings is also particularly important because ISAs are a powerful but controversial financing instrument. Proponents want to see continued expansion and innovation of ISAs, while critics of ISAs worry that students are unprotected and vulnerable. Rigorous research has the potential to bridge the divide between the two groups by grounding the discourse in empirical facts rather than motivated speculation.