‘Income Sharing Agreements’ Aim to Disrupt, Fill Gaps, in $1.7T Student Loan Industry

The student loan industry is a $1.7 trillion mess.

Defaults loom, staved off only by presidential decree (again). Tuitions rise at multiples of the inflation rate.

And of course, borrowers spend decades trying to pay it all back. That is, if they can get a loan in the first place — no easy task, according to Tess Michaels, CEO of Stride Funding.

“In the private lending industry, 92% of private loans required co-signers; less than a fourth of students actually have access to a credit worthy co-signer,” she told PYMNTS in an interview. “There’s a massive gap in the market that needs to be filled.”

The promise of embarking on a rewarding career path is what spurs individuals to take out school loans, she said, for both degree and non-degree programs. But with student debt taking more and more out of take home pay, the question arises as to whether it’s all worth it.

Income sharing agreements (ISAs), she said, offer a flexible alternative to traditional installment lending’s onerous payment schedules.

Through Stride’s ISAs, the company extends funding to help students pay for education. These students then pay Stride Funding a percentage of their future income, which is tied to rates the students are expected to earn after graduation over a defined payback period.

Under the mechanics of the agreement, students pay nothing if they are earning under a minimum income threshold, typically $30,000 to $40,000 annually. Upon earning wages above that threshold, they resume paying back their ISA at the same percentage rate.

Stride Funding has estimated that students generally will fulfill their obligations within 60 ISA payments (though Michaels noted the duration can be as short as several months), and well within a 10-year timeframe (even during period of downturns, the contracts with Stride Funding are extended a maximum of one month). That’s in direct contrast to the traditional student loan that can saddle an individual with debt that has to be paid on rigid terms no matter how their paycheck is faring.

Read also: Stride Funding, Credit Investors Partner on $105M Student Credit Facility

$105 Million Facility

The interview came against the backdrop where, earlier this month, the company said that it has partnered with Encina Lender Finance and other credit funds, through a $105 million senior credit facility that will let Stride fund students pursuing alternate education in high-growth technology and trade fields.

The $105 million facility, said Michaels, represents further gains for the alternative education space. She noted that the facility will be geared toward non-degree programs, which saw significant enrollment spikes during COVID-19, in an effort to pursue new (or deepening existing) professional expertise. Those same programs do not give students access to federal lending conduits, Michaels told PYMNTS.

“Students wind up paying out of pocket for expensive private loans,” she said.

But, Michaels said, outcomes-based lending products, such as on offer by Stride Funding, align the costs and value of education.

Drilling down a bit, she said that Stride Funding’s loans are a “healthy mix” between degree and non-degree programs.

The most prevalent segment, so far, is within nursing, where the company funds bachelor’s and master’s students across 140 universities.

“In our degree market, we always advise students to first take scholarships and grants,” said Michaels. “Then they take subsidized federal funding. And then after that when they’re looking at private loans versus unsubsidized federal loans, that’s where they look at products like ours.”

In the non-degree market, the company funds students in bootcamp and certificate programs (where the cost can be about $10,000). The company’s online platform leverages advanced technology for income and employment verification in tandem with firms like Plaid.

“We don’t want to be just a financial provider — we want to partner with these students,” said Michaels.

The typical percentage of income share is in the single digits, said Michaels, which in turn makes it easier to budget the cost of higher education along with everything else in life.

Looking ahead, Michaels said there is a “huge movement towards outcomes-based funding,” and noted that Stride Funding also offers deferred tuition plans, where payments are fixed, and triggered by a graduate’s income level.

As Michaels told PYMNTS: “We’re aligning the cost of education with the value of that education.”