June 8, 2018
How Income Share Agreements Work - Whiteboard Friday
Austen Allred

In this first episode of Lambda School's Whiteboard Friday, Austen talks about how income share agreements work. He walks through the math of it, and then talks about a few specific examples. He also touches on the differences between a loan and an income share agreement, when you would be required to pay back, and when the income share agreement would pause.

You can also view an example of an income share agreement here: https://leif.org/commit?product_id=5b1ad6c4e59b746f89b00067#/



Transcript:

Hey everyone, I'm Austen the CEO of Lambda School! Welcome to our first Whiteboard Friday. In Whiteboard Fridays we're going to talk about some of the things that you think about as a Lambda School student, alumni or potential student. We're going to try our best to explain topics that will be interesting to you or that you might have questions about.

Today, we're going to talk about income share agreements. If you've heard of Lambda School, you've probably heard of income share agreements, which are our very unique way that we finance a Lambda School education.

An income share agreement is really cool. It is a contract between a student and Lambda School where instead of paying upfront tuition or taking out a loan, a student simply agrees to pay Lambda School a percentage of his or her salary for a set amount of time, so long as that salary lies within certain thresholds.

Let's take a look at an example. The standard Lambda School deal is 17% of salary for two years, only if you're making more than $50,000 a year. Let's look at a couple of scenarios of what might happen.

Let's say you get a job at the smallest job possible salary that you could get. At $50,000 a year you would pay 17% of that $50,000 in the first year, which is $8,500. In the first year you would pay 17% of the $50,000 and in the second year, another $8,500 which turns out to be $17,000 total. Once you've paid that $17,000 the agreement goes away. You're done, you're paid off, and that's it.

There's also something that we call the cap, and the cap at Lambda School is $30,000. What that means is that under no circumstances will you ever pay Lambda School more than $30,000 total. That is a maximum amount that you could possibly pay. Let's say you get a job at Facebook and it pays you $200,000 a year. You'll pay that 17 percent of salary and you'll hit that cap in the first year. Once you've made $30,000 of payments, the agreement goes away and you're done.

Let's look at another scenario is not very likely, but it might happen. Let's say you get a job for $40,000 a year. That's something we don't see very often because most software engineering jobs pay quite a bit more than $40,000 a year, but it is possible. If you get a job that pays $40,000 a year, you're below the minimum income threshold and you don't make any payments. Maybe you stay at that job for six months. Maybe it's an internship, and then after those six months you get a raise from $40,000 a year to $80,000 a year. At that point, the two-year duration would start and you would start paying 17% of your income.

One of the main questions that people ask us about income share agreements is, "Is an income share agreement a loan?". An income share agreement is not a loan. A loan is based on a set amount of money, and there's interest that accrues and compounds, no matter what you're doing. With an income share agreement, if you lose a job, let's say you're making $75,000 a year, and then the company you're working for goes out of business. This is where income share agreements and loans start to look very different. If you have a loan, that loan just starts building interest, and it keeps increasing over time. If you're on an income share agreement, your payments simply stop. So, because your income goes to zero, the amount that you're paying goes to zero, and the income share agreement simply waits for you to get back on your feet and waits for you to start earning a salary again. It will wait for up to five years, and if at the end of five years you still haven't gotten above that salary threshold, the entire income share agreement just goes away.

One of the questions we get asked a lot is "Because an income share agreement isn't a loan, can it affect my credit score?". The answer is yes. Positive payments on an income share agreement may increase your credit score, not paying the payments as you should on your income share agreement may lower your credit score. You are required, according to the contract, to make payments according to your income share amount.

The next question that people tend to ask is, "How does Lambda School know how much I'm making?". Well, there are a few different ways. The first way is self-reporting, which is basically done through a platform called Leif Technologies that will ask you for updates on how much you're making and will adjust accordingly. The second way is we do a few things with payroll providers, but mostly we look at your tax returns to determine what you're making.

Another question people ask a lot is, "Does an income share agreement require me to work somewhere specific, or do I have to take the first job that I'm offered?". An income share agreement doesn't require any of that. It won't restrict your future opportunities. You can do what feels best and what is best for you at any given time. The only thing that it does say is when you're making that amount of salary, when you're above those income thresholds, you make the payments as you previously agreed to and that's it.

Another question we get a lot is, "What if we end up working in a field that's different than the field we studied in?". That's actually part of the income share agreement as well. When you sign an income share agreement, there will be fields specifically listed that you would need to pay payments on when you're working within those fields. If you end up, let's say as a bartender, making $100,000 a year, even though you're above the minimum income threshold you still won't make payments on that income share agreement.

And that's income share agreements. It's our way of doing our best to align the incentives of the school with the incentives of the students. We feel like if you don't get a job, and if Lambda School isn't a successful thing for you, then we shouldn't get paid. That's only fair. If you have any questions, feel free to ask them in the comments below or check out a link to an example income share agreement and we'll see you next week.