Are Income Share Agreements legal in India?

‘An income share agreement (aka ISA) is a contract between a student and an institute that allows a student to learn at zero initial fees in exchange for a fixed percentage of their monthly income for a limited period of time, once they get placed.’

The basic idea behind an ISA is the value transaction between two parties – the student and the educational institute. The student receives education and training, applies that to get the right job, and pays the value back to the institute in the form of fixed shares of their income.

For the sake of better understanding, we’ll go ahead and decode this innovative education financing model i.e. ISA (also known as the Pay After Placement model), and learn about its functioning, variations, and most of all legality.

Let’s get started-

What are Income Share Agreements?

Romeo has aspirations of becoming a software developer. But he's financially challenged to the extent that he can't afford the expensive courses that are available. Yes, he could take a student loan but he doesn't want to run that risk. What if he couldn't get a job after college?

Enters - Income share agreement.

Originally proposed by Milton Friedman, an American economist, an ISA would allow Romeo to start studying at zero upfront fee. Once he gets placed he can pay the tuition amount as part of his monthly income. If he doesn't get placed, he doesn't need to pay anything. No risk and yes rewards!

The maximum period to pay off the ISA amount ranges from 2-10 years and differs from institute to institute.

Sounds like the perfect solution to a huge problem faced by millions of students across the globe. All Romeo has to do is sign an agreement, a contract, and get on his merry way.

That's where the questions arise. Are these agreements legal? Who backs these contracts?

We, in India, are anyway skeptical of signing contracts. They scare us. What if we get caught in some crow trap?

And it's perfectly natural to have doubts, especially when it's about the unknown. (This article will tell you all you need to know about the ISAs).

And if you have a basic idea about ISAs, keep reading as we try to solve all your doubts.

Are Income Share Agreements legal?

According to the 3rd definition by Merriam-Webster dictionary, legal means something that is conforming to or permitted by law.

Are ISAs permitted by law? Of course, they are. If they were not, don't you think all the ISA bootcamps would have been shut down by now?

Theft and robbery are illegal, selling drugs is illegal, and even smoking on a plane is illegal, as the law doesn't permit any of these.

But ISAs are not illegal. It's an agreement between two parties.

If we were to say that I'd give you free food for a month and you have to pay me half of your next month's salary, the law can't penalize me for making this offer.

However, if we both sign a legal contract (affiliated with the judiciary) and you run away after the first month, then I can file a case against you for breaching the contract. That is a legally binding contract.

It's a similar case with an ISA. If two parties have signed it, and one party decides to breach the contract, the matter could be taken to the judiciary.

In other words, ISA is indeed a legal agreement.

(Story: Mahesh Guptha went from being a street salesman struggling with his family’s financial issues, to a software developer at LeapFinance, backed by the PAP agreement at Masai)

However, in India, there are no defined rules and regulations regarding the contract terms, payment amount, payment period, etc.

So, if Masai has an ISA amount of INR 3 lakh, and a maximum payment term of 3 years, any other coding bootcamp can have different terms & conditions.

The government of India doesn't have fixed regulations over the terms of the ISA contract, it solely depends on the institutes how much they charge and how much salary they're promising to their students.

Things to look for while signing an ISA

So, what does an ISA contract look like? If there’s no government regulation per se, how does one know what’s what? On what grounds does one make a decision whether to pursue it or not?

There are a few pivotal terms that define an ISA contract:

• Income Threshold - It is the minimum CTC/annual income declared by the institute that makes a graduate liable to pay back the ISA amount/tuition fee. For example: In Masai’s case, a student only needs to pay once he gets a job worth at least INR 5 LPA. So, INR 5 LPA is the minimum income threshold here.
  
• Payment Tenure - Of course, a placed student wouldn’t just have to continue paying forever. There’s a fixed time period after which the payments stop and the graduates are free of all responsibilities- that’s the ISA payment tenure.
  
• Payment Cap - This is the maximum amount a student will pay under any circumstances. There are a few variations to this when it comes to different ISA bootcamps.
  Some have flexible payment structures wherein; the total amount payable by the student directly depends on their income. So, a student with say, INR 30 LPA salary would end up paying more than the person with INR 10 LPA salary, over a 3-year tenure.
  However, at Masai, the total payment is capped at a single fixed amount for all students regardless of their income. Some students can get done with the whole payment in 1 year or some might take 3 years, but they’ll end up paying the same overall amount.
  

• Income Share Percentage - As we’d discussed earlier: the ISA payments made by the students are in the form of a fixed percentage of their monthly income. This is the income share percentage. (Masai grads have to pay at least 15% of their monthly income). Again, the number differs from school to school.

The partnership between NBFCs and ISAs

How does the agreement work? How does the school bear the cost of education for a student? Do they really make the investments?

Well, yes they do! But these investments are facilitated by NBFC partners like Propelld and Eduvanz. NBFCs, for those who aren’t aware, are non-banking financial companies engaged in the business of loans and advances. These companies are registered with the RBI and have the license to issue loans and investments to stakeholders.

These NBFC partners act as the backbone of the income share agreement model and provide the financial support to launch students’ careers, by acting as finance aggregators for ISA-based institutes like Masai.

When a student joins Masai, our NBFC partners raise or issue funds in the student’s name. Once, the student gets a high-paying job, they start making payments towards the agreement as monthly installments for a fixed time(2-3 years generally).

However, in case a student’s income falls below the threshold, the school then steps forward and takes up the payment duties towards the NBFC partner.

And that’s how this whole ISA mechanism works backstage in partnership with NBFCs.

Quite similar to how Apple does the Research & Development work for the iPhone and Foxconn, a manufacturing company is responsible for assembling the phones in bulk.

So, if NBFCs are registered with the RBI, and they approve a zero-interest loan to the student through a legally binding contract, there’s no question of the ISA being an illegal contract.

Is Pay After Placement the right choice for you?

About a year ago, I enrolled in a similar ISA-based marketing bootcamp called Kraftshala. At that time, I was stuck in the same money-education-job loop that many of you might relate to, and I saw ISA as a life-changing opportunity.

Three months later, I got placed as an SEO Executive here at Masai, and I’ve been working here ever since.

Now, I can say that it was certainly the right choice for me, as it gave me the perfect launchpad.

Nothing in life is guaranteed as we know, but taking the shot without having to worry about “what if I fail?” surely makes us more efficient and equipped. We all perform better under a certain sense of freedom, don’t we?

Pay-after-placement(PAP) enables ambitious individuals to break free and jump into the workforce on the back of sheer talent and hard work. It reinforces the idea that money shouldn’t be the bar for quality education.

If an institute is ready to trust and invest in your talent, shouldn’t you step up and grab this opportunity with both hands?