Universities Face Increased Pressure from Job Programs That Generate Results, Not Just Debt

The Income Share Agreement gives the program an incentive to actually perform.

Lambda School, a Y Combinator company that trains students in software engineering in exchange for a slice of their income for a few years, recently raised $30 million from investors in a Series B round. The core differentiator between Lambda School and its competitors is that Lambda operates under the Income Share Agreement (ISA) model.

The ISA model makes sense and is popular among students. They don’t have to pay anything up front, they receive training, and they only pay Lambda School back if they get a job earning more than $50,000/year. And it’s an improvement upon the sometimes-shoddy tuition-based model employed by coding boot camps since the industry started years ago.

Not long after Lambda School’s announcement went live, the criticism from the Twitter peanut gallery started.

And it seems to work. Not even two years old, Lambda School is worth more than $150 million after this most recent fundraising round, has more than 1,000 concurrent students, and now accepts students in the European Union.

It’s a good deal.

Not long after Lambda School’s announcement went live, the criticism from the Twitter peanut gallery started.

The most common comparison was between Lambda School and public education:

This kind of criticism from paper-belt intellectuals and the comment sections on their publications is so common that it fits a pattern:

I could write an entire book on the subject of media-versus-Silicon Valley/investors tension. But this specific case is worth digging into and asking, “Why is Lambda School different than public education and taxes?”

First, start by trying to understand the snarky critiques charitably. The “this is essentially public education” idea ostensibly operates on the premise that public universities train people in skills. They then take these skills and pay back their training in them through paying higher taxes because they can now earn more.

Fair enough, if that were true.

But neither premise is really true.

Universities Do A Poor Job at Helping People Get Jobs

Lambda School is a jobs training program at the end of the day. It’s a company designed to train people in a trade (software engineering). Whether or not it does a good job of that comes down to whether or not their students get jobs.

Once you get past the bluster of university marketing departments, you see that most students attend university in order to get a job.

If Lambda School’s success stories and growth are an indicator of how well it does that, then it seems to do well.

Most students attend university for the same reason. Once you get past the bluster of university marketing departments about enriching your worldview and becoming a better person, you see that most students attend university in order to get a job. Ask any room full of college sophomores if they would attend and pay money to attend but not get a job after four years, and you’ll see that most are there to get a job.

(Some say universities aren’t about job training but about learning about the world. That might be true—but that’s not the reason why most students attend.)

But universities don’t seem to do a great job at getting people jobs. As much as 40 percent of recent grads are working jobs that don’t require college degrees. Many of those working jobs that do require degrees landed those jobs through networking and recruiting, not through university career placement services.

But this goes deeper than universities not doing a great job with placement. They don’t do a great job at making people smarter, either. As Bryan Caplan explains in The Case Against Education:

Does education have any effect on genuine intelligence? Despite decades of research, we really don’t know. What we do know is that education has far less effect than meets the eye. The effect of education on intelligence may not be entirely hollow, but it is largely hollow. The effect of education on intelligence may not be entirely temporary, but it is largely temporary.

Students learn to the test, get good grades on the test, and then forget what they learned. Not exactly a big surprise to anybody who has actually taken a test in school.

At best, universities work as passport-issuers, to steal a phrase from Caplan. Getting through a few years of university gets you a passport that lets you actually go get a real job and then learn the skills you need to succeed at work.

They don’t actually have to get you a job because they aren’t accountable to that. You can’t take your degree back to Michigan State and ask for a refund after you’ve been working as a barista for four months. The university has its money. You were merely an input for them to collect student loans and tuition from your parents.

Who Pays for Whom?

In a public education model, you throw money at a group of students hoping the product of education will help them earn more so you can tax them more and then take some of the tax revenue to throw at more students.

Actual results may vary.

It is not an Income Share Agreement. The university gets paid regardless of outcome.

Without getting into the details of whether or not more public education equals more tax revenue, take a moment to think about the accountability model here. Universities get paid no matter what. A third party (the government) collects money from graduates (taxpayers) and then gives part of it back to universities. The university then takes this money and spends it on trying to attract new students—often by building expensive student housing and paying football coaches more than governors.

This may look like an Income Share Agreement. It is not an Income Share Agreement. The university gets paid regardless of outcome. It’s the third party that actually gets shafted. Taxpayers and the government have to hope that the universities do a good job of increasing student pay, but the universities don’t actually have to show that connection. Then there’s actually a fourth party in the form of the business or organization that hires the graduate, which must now bear the cost of training them since the university did a poor job. There’s no incentive to perform. If anything, there’s an incentive to just get more students in the program, regardless of outcome.

An Income Share Agreement model is much simpler. A student enrolls in a program and agrees to pay the program if and only if the program delivers results. If the student gets results, they pay the program a portion of their income.

My bet? Universities move towards an Income Share Agreement model or face bankruptcy.

The ISA gives the program an incentive to actually perform. The program doesn’t get paid unless the student gets paid. The student doesn’t get paid unless the program actually prepares them to get a high-earning job.

If commenters want to compare programs that actually align incentives to create success to programs that have no incentive to create success, they can. The ultimate decider of who is right ends up being customers in the marketplace.

My bet? Universities move towards an Income Share Agreement model or face bankruptcy as they face increased pressure from programs that actually generate results.

Further Reading

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