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Student Loans + Low Income = High Debt-to-Income Ratio. Here’s How ISAs Can Help.

by | May 6, 2019


Student Debt can Hurt Job Prospects. Income Share Agreements can Help.

Karthik Krishnan | May 6th, 2019 | Student Debt, ISA, Employment

Figure 1: Average MentorWorks ISA Income Prediction Error after Grace Period. Higher prediction errors reflects higher than expected income. Source: MentorWorks EdCap (

An important effect of student debt that has not received a lot of attention is that it reduces the amount of time available to finding a job and leads to compromises during job searches. Students have to make debt payments after graduation and must find employment as soon as possible, rather than search for a job with the highest salary or best possible fit. This leads to less satisfying career outcomes that can be unrelated to the loan holder’s field of study.


This is not a trivial effect – a 2016 study by student and personal loan provider Earnest finds that more than half of recent graduates report changing their job search because of student debt. Such individuals accept jobs faster to have income sooner and are more likely to accept jobs unrelated to their major. Importantly, individuals who changed their job search strategy due to student debt report being substantially less happy with their career outcomes.


Academic research finds similar effects. A Princeton research paper finds that debt induces graduates to enter employment faster and select jobs in unrelated fields, leading to lower income levels and growth rates (Weidner, 2016).

In our work helping students with education financing and career pathways at MentorWorks, we have seen first-hand how having debt can discourage career outcomes.

Our approach to financing education, which is becoming more popular, is through income share agreements (ISAs). In simple terms, an educational income share agreement is an obligation, but not a loan, where a student gets funded for education and pays back the obligation over a certain number of months, and the payment is calculated as a fraction of monthly income. Payments pause or are forgiven if income falls below a minimum threshold. If the payment term is completed (with or without payment) or if a maximum cap amount is paid, the obligation is over.

There are two ways in which income share agreements help improve career outcomes.

  1. They reduce the need for students to take on part-time jobs or internships that are unrelated to their field of study.
  2. Often, students take on part-time jobs to pay bills, including student loan interest payments. Not paying student loan interest can take a heavily toll on individual finances after graduation by driving up the cost of the loan. ISAs do not require such payments, and costs do not go up if you do not pay interest while in school.

ISAs make it easier for students to take up internships that provide them work experience critical to getting meaningful jobs after graduation, even if the immediate pay is lower.

How important are such internships? A recent employer survey by the National Association of Colleges and Employers (NACE) finds that 91% of employers prefer candidates with work experience, 65% indicate that they prefer candidates with relevant work experience, and 56% of employers prefer internship as the primary method of gaining experience.

  1. ISAs reduce the need for students to take on jobs quickly right after graduation, even if they are not in their field.

Students with ISAs can pause their payments without worrying about credit impact if they do not have income. This allows them the financial flexibility that debt does not provide to search for the best possible job – delinquency can impact credit and cause other issues. As a result, ISAs allow graduates to search for jobs in their field of study with the highest possible compensation levels. Studies also show that the first job has a strong effect on career outcomes in the long run. Thus, ISAs help amplify the long-term wealth effect of getting the first job search right.

This effect is also shown by academic studies. An MIT doctoral dissertation (Ji, 2016) finds that income based repayment allows better job search, and this alleviates the burden of debt repayment by insuring job search risks.

At MentorWorks, we have originated ISAs, and we are starting see these patterns among students entering payment status.

What our data shows

So let the data speak. But first, an important caveat – our sample is not statistically significant, so consider this early evidence. But guess what – the value benefits are economically significant, both for us and for our students!

Figure 1 above reports how actual income turns out relative to our prediction models when students we fund with ISAs are in payment status. It turns out that students earn less than what we expected in the first 3 months – and this reflects job search times. After the first 3 months, our average prediction error turns positive and stays there.

The evidence shows a strong positive correlation between income-based financing and career outcomes, and a negative one between student debt and career outcomes. Students need to carefully consider their financing options and their long term effects before signing on the dotted line. These effects also represent a long-term problem for the country’s economic development as well as a talent access pipeline issue for employers.

PS: Why are we called MentorWorks? We are a first fund and support education ‘accelerator’ model. Students we support get career guidance and interface with our employer partners, and when they do well, so do we! Learn more about us at




About the Author

Karthik Krishnan


Karthik is the CEO and Co-founder of MentorWorks Education Capital as well as a tenured Associate Professor of finance at Northeastern University and a former angel investor with Launchpad Venture Group. His teaching and research in the areas of entrepreneurship and education finance has made him a go-to-resource and thought leader on education financing having published various articles on the subject. He has mentored many students and assisted them in securing meaningful internships and jobs. Reach out to Karthik at