Before I begin, I have to thank The Information, as the Young Professional Subscription let me go for free.
On 9/19/2019, Slow Ventures, along with the Bipartisan Policy Center, Christensen Center, Omidyar Network, The Information, Vemo Education, and Whiteboard Advisors held a conference in D.C. called Life Capital DC. The primary focus of this conference was on ISAs, short for Income Sharing Agreements, a new method pioneered notably by Perdue University’s Back a Boiler program at first. However, the idea has recently picked up steam because companies like Lambda School have adopted ISAs to align their business models with student needs.
What is a ISA and why the Value Alignment?
A ISA, or income sharing agreement, is an alternative way of financing a education based on equity, instead of based on debt. Instead of taking a loan for the price of the tuition, one pays back a percentage of one’s earnings for a set number of years. An example being 17% of one’s income over a 2 year period. The benefit comes that below a certain income (usually between 50 and 60 thousand) one does not actually have to pay back the ISA during that period. This motivates a university | software training program to help place it’s graduates into jobs that pay well enough for the students to be above that threshold.
While I am lucky enough to have financed my education via scholarships, many of my classmates are not as lucky, and had to take out student loans to pay off their educations. While the university does provide some career support, the university doesn’t have any skin in the game regarding the quality of employment a student has after they graduate. Regardless if they sought services, under a loan-based system, one would still be on the hook for loans. Under a ISA, a university | training school is very motivated to place its graduates into well paying positions, because if they don’t, they are not going to get their money back. In other words, with ISAs, it is easier to create skin in the game. A practical example was for one company, a person getting a MBA was receiving help from the ISA company to land a high powered job after graduating. The motivation exists to do that because that way they not only receive good will, but more practically, it’s how they make money.
There are also several types of ISAs, ranging from ones meant to make a profit, ones meant to just make equal to tuition for an evergreen fund, along with ISAs designed for public-private partnerships to help educate workforces. Then most common are the 1st and the last form, with San Diego actually innovating in the field of public-private partnerships regarding ISAs.
Some Light ISA Math
To highlight this, let’s create a simple scenario. Imagine Bob, who is in a code bootcamp with a ISA program. His deal states that it’s 17% for two years. He receives career support, and manages to get a job making 85,000$ per year. In this case he would pay:
There are some additional benefits as well. Often times, when one stops working, due to the income minimum, they don’t have to pay the ISA. Secondly, unlike tuition, as a ISA is based on equity, not debt, the nasty problem of student loan interest rate does not appear. For reference, while in college many student loans don’t appreciate interest, once one is outside of college, they do. This can lead to a nasty problem where one pays more than they actually borrowed, as they are paying the interest, and not the principle. A ISA does not have this problem, because they lack a interest rate, and often have a cap of how much should be paid back as well.
Better Equity with ISAs
The fact that ISAs are based on equity and not on debt provides another advantage compared to traditional student loans. Disadvantaged populations, such as many 1st-generation college students, find it difficult to get loans on good terms because of lack of credit history. With a ISA however, because they are based on equity, one is not taking out money initially, so this barrier is bypassed.
While I am fortunate enough not to suffer from this problem, I know plenty of people who found it difficult to finance their education this way, even if they were obviously hardworking and intelligent people. By not requiring credit history to pay for their education, a barrier to education is lowered that historically harmed those who have suffered from inequality in various forms.
The Actual Conference
NB: The Conference abided by Chatham House Rules, so no names of the goers will be revealed.
The actual conference was a healthy mix of folks from Silicon Valley and D.C., along with a mix of how much knowledge levels regarding ISAs. One of the main virtues of the conference was to provide a light reality check on the conversation surrounding ISAs.
If one heard about ISAs and has been following them on Twitter, one would have thought that they had stormed the US education system by now. In practice, the adoption of ISAs has been a gradual process, starting with Perdue university, and recently a startup called Vemo Education helping universities set up their own ISA programs.
Several different people from various industries noted that one should be careful when working with ISAs, because it’s a financial instrument that still needs to be paid back. For example, a major university requires its students to take a quiz regarding the properties of ISAs, along with look at their future earnings and payment plan corresponding to the major and field that they intend to enter after graduating. Several think-tank and political representatives brought up a idea of ISA bill of rights, so that people who take ISAs are guaranteed a set of consumer protections.
There is even a bill on the subject of ISAs in congress on this idea, called the ISA Student Protection Act of 2019, by Senators Young, Warner, Rubio, and Coons. This bill, similar to one in the house, defines what a ISA is, along with creating a set of consumer standards and protections.
One representative brought out the cynical side, which while some thought was a bit much, I thought was a fair point. For example, making sure ISAs don’t hurt underserved populations, via targeting these groups, much like how for-profit colleges targeted underserved populations in the period before the 2008 financial crisis. This is along with the concern that ISAs will heighten inequality between STEM and humanities majors, due to a worry that the humanities majors will get worse terms then the STEM majors.
One interesting point bought up is the lack of finance instruments that exist to finance a college degree. Tying into the panel of imagining the future of college education, one could image more interesting methods of finance, such as a rough equivalent to a convertible note. One can also apply this model to other industries to provide protection for high risk professions, such as athletes or people in tournament structured industries.
In the end, ISAs, while not a silver bullet for solving the student debt crisis, at least look to be a better way to finance an education compared to traditional loans. This conference emphasized the point a little talked about benefit of ISAs is that they force a conversation about carrier paths, and how much will your education be worth after you received it. This in itself is useful, as it is cruel that 17 years are made to pick a university and field of study, with little guidance on what will actually benefit them after they graduate.