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Income share agreements, the private student loan alternative that allows students to borrow directly from schools or outside investors in return for a portion of their future earnings, make up just a small slice of the higher education market. 

Only $250 million of ISAs were originated in the U.S. last year according to Chuck Trafton, co-founder and president of Edly, an ISA investing platform, compared to $1.6 trillion of outstanding student loan debt. 

But the ISA market is growing. Forty colleges and boot camps either offered or were developing ISA programs last year, just three years after Purdue University became the first major U.S. university to do so. And before the COVID-19 pandemic slowed college enrollment, Edly estimated that as many as 175 schools could issue as much as $500 million in ISAs in 2020. 

Building on that momentum, a bipartisan group of U.S. Senators introduced a bill last year that they portend will allow the market to grow with more oversight. 

All of this growth has predictably attracted more capital to the space, as investors have become more convinced of the opportunity provided by ISAs. But until recently, one of the things holding the ISA market back was the market itself—or lack thereof. 

The Need For A Marketplace

Here is how the ISA market has traditionally functioned. 

A school decides they want to offer an ISA program to its students. The school then has to determine the terms, build out the backend systems, and create all the online materials necessary for marketing to students and parents. 

Then the school has to figure out how to fund the ISA program. Rather than self-fund, many schools instead open up their ISAs to outside investors in order to de-risk. But in order to do that, they need to create some sort of fund and actively seek out investors. This is not an efficient process for either party. 

“When Boston College floats a $50 million municipal bond, they don't write up the documents themselves and start calling up investors to get them to buy this muni bond,” said Trafton of Edly. “There's a marketplace for that. There are standards, there are investors, there's liquidity.”

Such a market has not existed for ISAs. And so beginning in 2016—the same year Purdue launched its ISA program—Trafton set out to create the marketplace that ISAs lacked. 

“We knew that in order for ISAs to really fulfill their potential and become a multibillion-dollar alternative to private student loans, there needed to be a marketplace,” Trafton said. 

How The ISA Marketplace Works For Investors

As the intermediary between schools and outside accredited investors, Edly provides a clearing mechanism, liquidity, financial analysis, and standardization of contracts and terminology. 

Trafton said Edly specifically focuses on schools that it believes are more likely to produce graduates in fields that earn higher incomes such as technology, nursing, and vocations. Accredited investors can either invest in specific school offerings or in a managed account. The EdlyOutcomes I managed account has a minimum investment of $10,000. 

Though the ISA market is still in its relative infancy, Trafton said they have attractive features for investors—particularly in light of what the COVID-19 pandemic did to other income-generating assets.

“Well, number one, it's an attractive return. Junk bonds are yielding about 4%, and we're targeting 12-14% on our ISA pools. Many investors such as family offices, high net worth individuals, and institutional funds for example, are invested in real estate for income, which is currently an extremely challenging market.”

Investors also are attracted to ISA investing as an inflation hedge, as the income received is based on a fixed percentage of wages. Between the demand from investors and students’ need for an alternative to private loans, the biggest bottleneck for ISAs right now, he said, is awareness. 

“ISAs have the potential to be a multi-billion dollar asset class, but not the way that it was going 2016-2018. We believe in the ISA concept very strongly, but knew that if it was going to fulfill its potential for millions of students and their families, a marketplace like Edly was required. So we built it.”