If a student takes a four-year hiatus from the workplace for graduate school, unpaid internships, child-rearing, a stint in the Peace Corps, or any other reason, all payments will also be deferred for four years. Unlike with loans, however, the recipient will not be accumulating interest on their ISA—the percentage of income paid will remain the same regardless of when they pay it.
There are several other substantial differences between ISAs and loans, most notably the fact that many people are unfamiliar with the former. An American Enterprise Institute study found that only 7 percent of students and 5 percent of parents had even heard of an ISA. When it comes to selecting the best financial-aid options, raising awareness of all of the choices available is only the first step.
“Part of what you’re seeing here is that as more payment plans come into the marketplace with different terms, it becomes challenging to see what’s the best deal for the student,” Miller said. “And getting it wrong could end up costing you a fair amount of money.”
The terms for these ISAs might be favored by students: The same American Enterprise Institute study found that, although initially skeptical, when presented with repayment scenarios for loans and ISAs side-by-side, more than half of the respondents preferred the repayment terms of ISAs.
“We’ve certainly focused on those students that would take those Parent PLUS or private loans on top of government assistance,” Daniels said. “We think that ISAs in most cases are clearly superior to those private loans. We haven’t counseled anyone to take them instead of public-subsidized loans.” Private loans are difficult to secure without a parent cosigner, effectively barring some students that may need them the most.
“Loans keep score with interest; ISAs keep score with outcomes. If you pause payments on a loan because of financial hardship, the amount you owe will increase,” said Tonio DeSorrento, the CEO of Vemo Education. Vemo Education operates the ISA program at Purdue and is working with additional universities to set up similar financial-aid programs. “Because ISAs keep score with outcomes, people aren’t punished if they’re unemployed or have low earnings.”
According a 2008 report from the Institute for Higher Education Policy, many college-ready students who decide against college are unwilling to borrow money for tuition. For these debt-averse students, ISAs could be the answer.
“For students and parents who are borrowing to pay for college, they’re often doing that because they want a well-paying job,” DeSorrento said. “When a college is in an ISA with a student, it’s sharing outcome risk with her. College isn’t just about getting jobs, but for many people, at least some of the value is the job, so linking some of what’s paid to colleges to employment outcomes can help colleges better serve students.”