Are Income Share Agreements Really the Best Option for Students?
Income Share Agreements (ISAs) are a new way of financing education that are really starting to catch on, and for a good reason too - they are a downright GREAT alternative to traditional student loans, but are they the best option for financing education, and specifically for financing a coding bootcamp? Let's start by taking a look at what ISAs are, and then we can discuss common variables that should factor into any financial decision to see how ISAs stack up against other options.
ISAs are pretty much just what they sound like, a graduate shares his or her income with the educational institute they attended after they receive a job. Unlike traditional loans, if a graduate doesn't get a job, they don't have to pay anything! This model takes a lot of the risk off of the student and places it back on the school to ensure that the curriculum and career services are truly what students need to break into an industry of study. Essentially, if the student doesn't benefit from the program of study, than they are off the hook for paying the school back - which really motivates the school to have a stellar program!
With a virtually guaranteed job or no need to pay for one's education, is it even possible that an ISA isn't the best financing option for any given situation? As with any financial decision, you want to look at how much is the upfront investment, how much is the total investment, what is the risk, and what is the ROI.
One great thing about ISAs is that the upfront investment is nothing but time. Students don't need to pay any money (unless the specific plan requires a down payment or deposit) to start learning, they only need to dedicate the time needed to take the program and study. This is similar to a traditional deferred loan where students don't have to start paying back their loans until after they graduate. However, in this case payments are deferred until students get a job or forever, whichever comes first!
We'll come back to the total investment piece later, but for now let's skip to the risk. The risk is, fortunately, tied to the up front investment. If, for whatever reason, you don't end up getting a job then the only risk is losing your investment, which is time. The time spent on gaining your education, that could've been spent on a million other things you needed to do, is gone. However, this risk is the same in any other financing option because regardless of how you pay for your education, you have to put in the time to learn. Since all models include this risk, it's safe to say that ISAs get high markings in the risk category because they have only this risk.
Return on Investment
Although the return of any financing model can be the same (i.e. a graduate gets a job and makes $X salary), it's the `I` in ROI that makes ISAs stand out here. If three people each buy a house, and a year later they each sell their house for $300K, the person who put the least amount of money into the house (purchasing, upkeep, realtor fees, etc) had the greatest ROI, which is typically a heavily weighted variable in investment decisions. In order to calculate the ROI, we need to know the full investment made in a students education, not just the upfront investment - and that brings us to the fourth category.
Total investment is very important to take into account when determining which financial model to use to pay for your education. Up until now, ISAs have blown away most competing options, and for very good reasons. However, if an ISA requires that you pay 10% of your income for 5 years up to $50,000, it may not be the best option, even if you are guaranteed a job before making any payments. For example, most coding bootcamps cost between $12K and $20K. If you are in San Francisco and make $100K coming out of a bootcamp you could end up paying 2.5 times as much for your education as you would at one of the most expensive bootcamps. Even if you are in a smaller market than San Francisco and make $60K after graduating, that is still $30K - $10,000 more than an expensive bootcamp costs. So, the ultimate question is does the lower risk make the higher investment worth it? The answer - it depends. If you can pay $10K and get the same result, then that is probably the better option, but if you are looking at the difference in taking out $20K in loans vs a probable $30K in an ISA, the ISA isn't a terrible idea. The biggest problem with ISAs is that you don't know how much the total investment will be, and it will typically be higher than other traditional loans - sometimes even a lot higher.
A Better Alternative
Traditional loans, paying up front, and ISAs all have their advantages and disadvantages. An alternative to all these options that combines the pros while reducing the cons is a model that has flat rate, 0% interest, and where students only start making payments when they get a job. A model like this removes the unknown, typically high total investments that accompany ISAs (as long as the flat rate isn't excessively high), while retaining all the wonderful benefits such as low risk, low upfront investment, and high ROI that ISAs bring to the table. Promineo Tech offers such a model. With the total cost of the software developer bootcamps set at $7,800 (well below the typical $12K to $20K, and a huge margin below most ISA total investments), students pay a small deposit of 10% and don't have to start paying the rest back until they get a job in the industry making at least $50,000/year. While ISAs are a really great option, the model that I just mentioned is clearly the better alternative.
In summary, ISAs can be a wonderful alternative to traditional financing options, but you should always make sure to look into all available options and treat them like an investment, because that's what education is, one of the most important investments one can make.