We started Lambda School with one overarching goal: to create a school where the incentives of the school are entirely aligned with the incentives of the student. Today we’re excited to further that mission by announcing a new blueprint for incentive-aligned ISA financing, and a $100 million investment in Lambda School’s ISAs.

How We Got Here

Incentives in traditional higher education today are fundamentally misaligned. Universities are not financially incentivized to ensure students succeed, creating a broken system in which students assume massive risk (and debt) with no guarantee of success. The result has been a generation crippled by more than $1.6 trillion in outstanding student loan debt.

We believe that part of the solution to this problem is incentive alignment. Instead of utilizing student debt, Lambda School offers income share agreements (ISAs), so our students only repay tuition when they land a job making at least $50,000 a year (FAQ here). This means our school can only succeed if our students do.

In this new model the school must find a way to cover upfront student expenses. As a new company, the only way we could fund tuition costs in the beginning was by utilizing venture capital, but VC investors want to make big bets and see big multiples. Venture capital is perfect for investing in quickly growing companies, but not right for investing in ISAs. We knew from the beginning that we’d need to figure out how to finance ISAs in an aligned manner to make our school work long-term. 

Another suboptimal option would be to sell ISAs outright. Simply put, we could sell ISAs to an investor, and if students are hired and make payments, the investor will be happy. If not, the investor will stop buying ISAs and the school will eventually go out of business. Unfortunately this feedback loop takes years, and there is no short-term incentive to which schools can be held accountable.

Neither of these solutions are the right long-term approach for Lambda School and are not representative of our values.

Our finance team spent over a year designing a way to finance ISAs so that all of the following remain true:

• The school retains skin in the game.
• The school makes more money if students are more successful, and less money if students are less successful.
• That feedback loop happens quickly – the school’s finances are swiftly affected by student performance.
• The school will go out of business if students don’t succeed.
  

Introducing Our New ISA Financing Model: Keeping Incentives Aligned

Today we are excited to roll out a new financing mechanism with marketplace partner Edly. This methodology allows us to provide value to students, grow sustainably, and keep incentives aligned – without needing to continuously rely on venture capital.

Perhaps most importantly, it will not affect the student experience or payment amounts. Here’s how it works: 

1. ISA contracts are grouped together in cohorts of 300-1000.
2. Investors use historical placement and repayment data to determine the likely future value of those ISAs, and apply certain discounts to create what we call a “performance adjusted advance.” Investors pay an advance, which is used to cover some of the cost of the training.
3. Then, that advance is performance-adjusted automatically - meaning it adjusts based on a three-month review. If students do better - find jobs faster that pay more - the advance goes up. Similarly, if students do less well the advance goes down.
4. The school supplements the advance with its own cash to cover the remaining cost of training students.
5. The group of ISAs first repay the investors the advance plus interest.
6. After the advance plus interest has been paid back, the school and investors share in the ISA payment revenue collected thereafter, with Lambda School getting the majority of that revenue.
   

In short, Lambda School gets a limited, weighted advance to cover some of its basic costs, invests money of its own, and the remainder is entirely dependent upon outcomes. Because a student’s payment obligation is only governed by the ISA, this creates no risk for students, and the school’s success still completely depends on student success.

It also means we can lower operational costs and do more for students, such as investing in curriculum improvements, expanding our instructor team, improving the immersive Build Weeks and Lambda Next programs, hiring more people for career support, and providing additional student services like Modern Health, free of charge. Lastly, this arrangement will not affect the student experience during or after Lambda School.

This is a lot of detail—more than students need to understand—but we’re choosing to be unusually transparent about Lambda School’s finances because students deserve to understand the incentives of their school. This new blueprint not only preserves the incentive alignment we've oriented around from day one, but along with the new $100M financing, it also means we can continue building the school our students deserve.

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Published February 19, 2020