Income Share Agreements at Lamda School

Excellent reporting here by Ben Sandofsky about the fall of coding school / boot-camp Lamda School.

In the past, I had believed in the idea of Income Share Agreements (ISAs) which allowed a student to effectively sell “equity” in themselves in exchange for an education. Once the education was complete and the student landed a job, they would pay back X% of their income for Y years up to a maximum cap of $Z. This was in contrast to taking out a loan which would be a fixed dollar amount and have to be re-paid regardless of what that student ended up earning post-graduation.

ISAs seemed to be a way to align the incentive of the school (get our students a solid education and a high-paying job post-graduation) with the student themselves (get a high-paying job)! But in practice, at least in practice with the Lamda School, they failed. Miserably.

From Ben’s piece:

Income Share Agreements had a huge red flag in the form of decades of failed experiments. Milton Friedman proposed ISAs as far back as 1955, and many schools experimented with them over the years, from Yale in the 1970s to Purdue in 2016, shortly before Lambda School. Every school that tried them abandoned them, for reasons we’ll learn in a bit.

A quick look at the Wikipedia page for Income share agreements reveals some interesting history of how Yale pooled students and had them pay off the combined cost of the education for all of them – those who netted higher paying jobs would float along those who didn’t work or earned less. I’m reminded of the common refrain in tax politics today wherein we want the wealthier individuals in the country to “pay their fair share.”

Ultimately, the question for tax policy and ISAs and debts in general boils down to what that “fair share” actually is.

Education is a cornerstone of the growth and success of a society. Investing in it is similar to investing in infrastructure, health care, or clean water. The benefit of having a highly educated workforce and general population will almost always¹ exceed the costs of achieving that education.