Taking Baby Steps Toward Incentive-Aligned Higher Education and Job Training
Oct 28, 2020
a woman in glasses studies

As Halloween approaches, the college experience seems filled more and more with unpleasant tricks rather than educational treats. Higher education is nowhere close to perfecting the online student experience amidst COVID-19. From disrupted curriculum and subpar distance learning tech to disjointed health strategies and COVID-19 fees, the already risky financial burden of higher education is even riskier for students.

The horror stories are forcing a fundamental reexamination of the college experience, its costs and benefits.  At Lambda School, our goal from day one has been to create an education model where the incentives of the school and student are aligned. In addition to recent curriculum and job search initiatives, we remain committed to easing the financial burden our students face.  We believe that Income Share Agreements (ISAs) – a tuition financing model in which students don’t have to pay any tuition until they land a job – are the most student-friendly, lowest-risk alternative to traditional student debt available today.  

Over the past year, Lambda School worked to advance an ambitious goal: become the first online school approved by California regulators to offer ISAs. We achieved a major victory when state regulators licensed us as a school in August, representing a significant endorsement for our all-online, career-focused education model. However, in order to secure this approval, we made the difficult decision to stop offering our ISA option to students in California. 

To be clear, ISAs are a tool, not a strategy. Incentive alignment between schools and students is the objective. The best mechanism to get there might not always be the ISA. As long as the underlying principles of student protection and incentive alignment hold true, that’s what matters. That includes no upfront cost, income-based repayment, and a payment expiration date, among other protections. 

Thankfully, the tuition financing alternative we introduced in California (a Retail Installment Contract) preserves many student protections from the ISA. Importantly, it still allows for zero upfront payment and no interest. However, it loses some of the most notable benefits, such as the expiration date. Our ISA is terminated after students make 24 payments or go 60 months with deferred payments (even if they haven't paid us anything). With the RIC, all students must now pay the maximum $30K, no matter how long it takes. 

Regardless of this disappointing caveat in our California approval, the achievement holds significant weight: it signals a new era of education in which institutions are called to invest in their students upfront instead of the other way around. California regulators are setting a positive precedent by affirming schools that are incentivized to ensure their students succeed financially after graduation. Because for far too long, the opposite has been true. 

So why is traditional higher education so imbalanced? The simplest answer is incentive misalignment. Students take on the massive cost of tuition before ever setting foot on campus, but universities don’t fail or succeed based on students’ career outcomes. Schools don’t have real skin in the game.

That’s why new financial models, where students don’t pay until they are hired, are so critical. They force alignment by pinning an institution’s financial future to the financial futures of their students. With incentive alignment, schools don’t succeed unless their students do. 

Not only do students deserve better options, but they’re starting to demand better options. At our own school, 93% of students surveyed in December 2019 indicated they would not have enrolled if it hadn’t been for the ISA option. In January, the University of California San Diego Extension extended its partnership with the San Diego Workforce Partnership allowing students to take tech career-focused courses with an ISA. And California legislators have pushed multiple bills related to piloting ISAs in the state (sadly, with no success so far). At the federal level, we supported the ISA Student Protection Act of 2019 alongside other online schools and traditional universities like Purdue. 

Our higher education landscape is in a tailspin, and regulators and institutions are accountable for our next generation of students. The status quo doesn’t cut it anymore. Students know they deserve better — they deserve an education system that invests in them — and they’re starting to demand it more loudly than ever.  Last week, I shared that we updated our refund policy to be more forgiving. That’s just one piece of the ongoing iteration we’re doing to keep financial risk low for students and maintain incentive alignment. Long-term, however, it will take major regulatory change to scale that alignment across our higher education system. California is a major milestone toward that goal.

We’re continuing to fight for the regulation, adoption, and usage of ISAs in California. It may not happen this year as we hoped, and it may not always be the ISA that gets us there, but change is coming. We’ll continue to share updates on incentive-aligned education and ISA advocacy across social media. Follow us on Twitter if you’d like to stay in the loop.

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