Lambda’s Student Loan Alternative

student loans

Student debt in America has grown to staggering proportions. By the end of 2018, 44 million Americans collectively held $1.5 trillion in debt related to the pursuit of education. Today around 70 percent of students graduate from college with some kind of student loan debt, on average about $22,000 worth, according to the National Center for Education Statistics.

And those loans can take a long time to pay back. Though federal loans are structured so that door-to-door they take about a decade to pay off, according to the Citizens Financial Group the majority of students — over 60 percent — take a good deal longer than that. According to the data, it takes many student closer to 20 years to pay off their education — meaning they are carrying those student loans well into their 40s.

It’s a high cost for borrowers to bear. But student loans don’t just cost students — they are starting to exact a toll on the economy as whole, according to experts.

“It’s not something you can pick up in the data right now. As this goes on and as student loans continue to grow and become larger and larger, then it absolutely could hold back growth,” Federal Reserve Chair Jerome Powell noted a little under a year ago. “You do stand to see longer-term negative effects on people who can’t pay off their student loans. It hurts their credit rating, it impacts the entire half of their economic life.”

But while bemoaning the high cost of secondary education is a popular position, it does little to ameliorate the situation. Education continues to get more expensive, and students  are taking on ever more debt to keep up with the cost. But solutions? Those are a lot fewer and further between.

This is where the Lambda School enters the story.

Founded in 2017 as an online learning startup, Lambda has caught the attention of some big names in venture capital. As of early January the firm has snapped up $30 million in new funding from the likes of Geoff Lewis, the founder of Bedrock, along with Google Ventures; GGV Capital; Vy Capital; and Y Combinator. The learning startup has also drawn some celebrity interest, with actor Ashton Kutcher among its investors. Those new funds, which bring the startup’s valuation to $150 million, will be used to take Lambda offline and develop it into an actual multidisciplinary school offering half-year programs in professions where there is significant hiring demand, like nursing and cybersecurity — on top of the coding and data science courses it is currently offering digitally.

But while founding a school is perhaps not all that unique in America in 2019, the way students pay for that education is. Lambda makes use of income share agreements (ISAs), which means that up front, students pay nothing for the education they receive through the program. Instead, under an ISA, students are required to pay a percentage of their income for a set amount of time after graduating, provided they find a good enough job and earn enough money to make that payoff. For Lambda, students are required to pay 17 percent of their income for two years after graduation, if they find a job that pays $55,000 a year or better. Payments are capped at $30,000, so a highly-paid student isn’t penalized for success, and if a student loses a job, the payments pause.

The ISA model, Austen Allred, co-founder and chief executive of Lambda noted, gives schools a reason to see students as something other than cash cows who will pay no matter what — and has moved educational institutions away from being passive players in the game to active investors in their students’ lives.

“There are no schools that are incentivized to make their students successful anywhere. The schools get paid up front, they get paid in cash, whether that’s by the government or whether that’s by an individual doesn’t really matter,” he said. “At the end of the day, the schools get paid no matter what. I think in order to create better outcomes the school has to take the hit.”

Lambda is not, as of yet, conceived as an alternative for a four-year education. Instead, Allred explained, the school is built around filling gaps in employment, meaning places where there are worker shortages are usually where Lambda starts its program construction efforts.

But as Lambda is gaining traction and investor interest, many are watching and wondering if the ISA model could be adapted and applied to collegiate education as an alternative to taking on tens of thousands of dollars in debt.

It’s an open question, since the ISA model has critics.

Some say that the ISAs are basically a modernized form of indentured servitude, and that the 17 percent bite out of a student’s income for two years is essentially predatory. Proponents respond that no one is conscripted into labor and that those who pay tens or even hundreds of thousands of dollars in student loans off one month at a time for 20 years are paying a lot more than those who are paying 17 percent for two years.

Other critics note that these types of programs are going to be yet another nail into the coffin of the traditional liberal arts education — on the argument that schools will favor with funding areas and departments that have a better track record of producing high-earning jobs. English, philosophy and Russian literature are all fine things to study but don’t have quite the income production track record as other majors — such as biology, business and computer science.

While schools may more readily invest in students in that latter category of studies, schools with more focus in the former category might find it harder for their students to get funding and thus find themselves starved of students going forward.

Moreover, as the New York Times points out, this kind of model will also have schools seeking students who are the best investment — meaning promising but non-traditional students run a risk of being left out.

And while Allred has heard these critiques, he argues that the status quo in many cases is worse. Higher educational facilities are already screening for the “best investments” — a fact to which anyone who has ever been through a competitive college application process can attest. And as for students left behind, he noted, the really victimized group are those who paid for opportunity through education only to find out the education they paid for affords them no opportunities.

“I look at some of the predatory, for-profit educations that just don’t care. I don’t think that’s a win for anybody, including the students,” he said. “I think schools should be actively trying to determine who will be successful and that’s part of your job. Harvard does that, right?”