How to Complete Your Income Share Agreement: Payment Cap
Completing your Income Share Agreement: Payment Cap.
Student debt is a significant problem, outstanding student loan debt in the United States is at around $1.6 trillion the second highest source of household debt in the country, and it continues to go up each year.
What if you never had to take out student loans to pay for school? What if, instead of borrowing money at a certain interest rate, you simply promised a percentage of your future earnings to cover the cost?
That’s what an Income Share Agreement (ISA) is. A way to pay for a college education post-graduation through a percentage of salary earned rather than by using a traditional student loan. Income Share Agreements allow students to pursue their educational and career goals while limiting potential financial risk by only requiring payment once the student secures a job.
An Income Share Agreement works differently than a private student loan, students don’t have to worry about paying back a principle or mounting interest. If you’re interested in learning more about Income Share Agreements check out this blog post.
Because of how different ISAs are in regard to repayment, it’s important to educate students on the different ways to pay back their ISA. We have a whole guide on how to finish paying an ISA. After reading this post, if you have any other questions about Income Share Agreements, check out our ISA page.
There are three different ways to finish your ISA. Required Payments, Payment Cap, and Payment Window. In this blog post, we’ll be covering the second way you can finish your ISA:
Reaching the Payment Cap
One way to satisfy your ISA is by paying the Max Payment Cap. But, before we go any further the most common way for one to satisfy one’s ISA obligation is to make the required number of monthly payments. With an ISA, you pay back a percentage of your earnings each month for a set number of months. Each of these payments is considered one of your Required Payments. But the Max Payment Cap is in place to protect high earners from overpaying through the Required Payments.
The Max Payment Cap is built into your ISA and is the most you’ll ever need to pay towards your ISA. It is a built-in protection for high earners so that they are not punished for earning more than expected. A Payment Cap is usually some amount more than the Funded Amount (the amount the school is fronting you for their program as part of your ISA). Once you hit your Max Payment Cap, your ISA is completed.
For example, your ISA terms are 10% of your monthly income over 24 required payments (read more about required payments here.) Your Max Payment Cap is $12,000. According to your income, you would pay $500 per month to your ISA. If your income doesn’t change for 24 months and you make each of those $500 payments each of those months, your ISA would be finished. But let's say, you’re killing it at your job, and 10% of your income would now be $1,000 a month. If you had to make the same 24 repayments, you would pay double the amount over the course of your ISA.
If you pay your $1,000 payments each month, you’ll hit your payment cap in only 12 months. You’ll pay it back a full year earlier than if you were making the 24 required payments!
The Payment Cap is not necessarily the amount you are trying to payback
Paying down your Max Payment Cap is something that many get fixed on as being the only way to finish their ISA. It is not necessarily a goal to pay this amount back, rather it is a safety net to protect you if you are a high earner. Though it can seem like it, a Payment Cap is not the same as a principal in traditional loans. The Payment cap is a protection put in place to keep high earners from paying too much on their ISA, not the goal that you should necessarily strive to pay.
If you want to pay off your ISA early, you need to pay the whole cap
While your overall goal isn't necessarily to pay down your payment cap completely, it is how you can end your ISA early. If you want to pay off your ISA early, you do have to pay the full Payment Cap. Keep this in mind if you are wanting to be finished with your ISA as soon as possible, as you may end up paying more reaching the payment cap than if you were to simply pay the required payments each month. If you want to finish your ISA early, paying the Max Payment Cap is the way to do it (you can even pay it all at once!). Do your research on the ISA terms of the program you are planning on attending and calculate what the cost might look like to decide if paying your payment cap early is best for you.
You can make extra payments towards your payment cap
Another point to be aware of is that you can make extra payments towards your ISA. For example, if you make one of your required monthly payments and then decide you want to pay an extra $500 in the same month, this payment does not count towards your Required Payments, but your extra payment counts towards the Payment Cap and will lower the cap by that extra $500.
If you’ve ever wondered how to finish paying your ISA through the Payment Cap hopefully, we’ve been able to answer all those questions! If you’re ready to jump into a new career using the power of an ISA, check out all the amazing online training programs that offer an ISA on our student's page here! If you’re interested in offering an Income Share Agreement at your program click here to schedule a meeting with one of our ISA specialists.