Income Share Agreements and the Future of Education

January 28, 2019

Education is not often the first domain people think of when it comes to innovation. Across the United States, the education system developed its organizing principles in the early decades of the 20th Century and has been slow to adapt to the pressures of a fast-paced, digital society. The recent funding round of Lambda School, which raised $30 billion from a diverse group of Silicon Valley venture capitalists, indicates that a change in education might finally be upon us.

Lambda School is an online, for-profit, coding boot camp from San Francisco, which prides itself on its ability to get students jobs. This helps it stand out from many of its online competitors, which provide valuable resources to students, but have failed to develop adequate accreditation procedures to help employers judge student quality. They also stand out from university degrees in a myriad of ways that allows Lambda to attract students and help them flourish. Not only is there no campus, allowing its students to learn entirely online, but they offer students an opportunity to earn a degree entirely without debt. Lambda’s Income-Share Agreement or I.S.A. allows students to avoid paying anything for their education up front in exchange for 17% of their income annually for two years — which only applies if they earn at least $50,000 a year, and is capped at $30,000 in total. If the student does not find a well-paying job within five years of graduating, they are not obligated to pay Lambda anything for their education.

This model differs extensively from a system in which education is paid for up front and schools feel no pressure to emphasize real world skills and job placement. Students at traditional universities often find that their expectations from their education, to get a decent job, differs widely from their professors’, who often have never worked in the private-sector and are unaware of current job requirements. Despite this, alternative paths to employment (rather than the university route) have been inconsistent at best. Bryan Caplan, in his book The Case Against Education, argues that this is because higher education provides a valuable signal to employers that alternatives have failed to supplant. Education is less about the specifics of what you learned and more about the demonstration of your ability to learn and be a good employee.

Lambda’s approach and their offering of I.S.A.s has provided a significant step in the advancement of vocational alternatives to universities. Their approach to making profit sees their students as investments, which forces them to emphasize practicality and real-world skills. Their accreditation system is valuable to employers and allows companies to adequately assess the value of their students. This for-profit approach to education provides a template for new competitors and complements to enter the market, either competing directly on coding education, or expanding the approach to other, in-demand vocational skills. Ultimately, this provides a more competitive landscape for higher education and vocational training, improving opportunities for students and the talent pool for employers.

Some may say that the Lambda approach is suitable for vocational training, but is hardly enough to really change education. Universities are about more than job training facilities, and emphasize all sorts of human and critical thinking skills that sustain an informed and democratic citizenry. Given the skyrocketing cost of tuition, administrative bloat, and high youth unemployment rates from non-STEM degrees, however, it is reasonable to ask whether their incentives are wrong.

Traditional universities, like Purdue in Indiana, have offered Income Share Agreements, which they call Back a Boiler, for students who spend their federal loans, and have experienced an increase in both job placement and student satisfaction. Making students employable may not be the only goal of a university, but it has sadly been neglected as one of their vital roles. Non-university competitors are likely to put pressure on universities to adapt, should they not give students what they want. This is market competition improving lives at its finest.