
Income-sharing agreements let students trade future earnings for investment - pseudolus
https://www.bloomberg.com/news/articles/2019-04-09/college-grads-sell-stakes-in-themselves-to-wall-street
======
Traster
The obvious point to make is that American student loans already suck so this
may be an alternative. However, this makes me feel really uncomfortable. The
first is the same reason as student loans: At the age you're agreeing this you
are very unlikely to correctly judge your own value. It's the same reason why
students take on ridiculously onerous student loans.

The solution to that problem in my mind though is to regulate out of existence
exploitative student loan conditions. Instead this mechanism creates a whole
new way that lenders can rip students off. The Yale example is good but let me
pick at this:

>Purdue, for example, caps total payments at 2.5 times what a student
borrowed, so the most successful don’t feel gouged. That would be a 15 year
loan at 15% APR. That IS gouging.

There is a good reason why super high APR loans are heavily regulated -
because they're almost certain to cause debt spirals and are only entered into
by those who are desparate. The nature of finance companies creating these
schemes is that the schemes will be designed to favour the finance companies
not the students. So in no way does this solve the problems that students
face.

~~~
TadaScientist
15% on student debt? Jesus christ - it's more expensive than unsecured lending
/ credit card debt

~~~
leetcrew
first, student debt _is_ unsecured lending. second, where are you getting a
credit card with less than 15% APR. I want one too.

~~~
digitaltrees
Student loans can’t be discharged in bankruptcy and are often backed by the
government so a default gets paid in full. Basically, effectively secured.

------
sct202
Am I reading this right? You have to pay 2.5% of your income for 7 years as a
comp sci graduate for a loan of only $10k. Seems like a pretty terrible deal.

Edit: Avg comp sci grad salary from Purdue is $72k, assuming 5% raises on
average including promotions, you'd pay about $14.6k for this loan, which is
roughly equivalent to a loan with an 11% interest rate per year over 88
months.

Edit2: I was a business major, and if I used the finance major's payment
percentage and term length, I would have paid $20k back over the term of 8
years which is basically like a 20% interest rate per year.

~~~
barry-cotter
It is a terrible deal. Lambda School’s stipend programme (places limited) pays
students $2,000 a month for the nine months of their job training, while they
get trained 40 hours a week and that includes interview prep and placement and
job search help that makes university careers offices look like they’re going
through the motions, not trying to get the students a job.

And after paying students $18,000 and spending nine months getting them job
ready and helping them find a job they only have to pay back

> Upon completion of the program, students will pay 10% of their salary for a
> five year period once they're making at least $50,000 per year. The max
> possible payment is capped at $50,000.

[https://lambdaschool.com/stipend/](https://lambdaschool.com/stipend/)

Or if you don’t get the stipend

> There are no up-front costs required to attend Lambda School; we only get
> paid when you do. Once you’re earning at least $50k per year you’ll pay back
> 17% of your income for the first two years.

> Total tuition possible is capped at a maximum of $30k, so no matter how much
> you’re getting paid the most you could possibly pay is $30k.

[https://lambdaschool.com/about/](https://lambdaschool.com/about/)

~~~
RankingMember
This seems pretty amazing. If anyone who's gone through this program sees
this, what's the catch/is there a catch? Seems almost too good to be true.

~~~
Matticus_Rex
They're a YC company. I've seen their students on Twitter talking about how it
transformed their lives.

I think it's just the first salvo in a disruption that's been waiting to
happen for a while.

------
velcrovan
Make the college free and provide students with a living stipend. Return
higher education subsidies (and tax brackets) to their 1950s levels. Join the
rest of the developed world.

~~~
simonsarris
Absolutely not, at least not without making college _much_ more difficult.
Otherwise it is just subsidizing adult daycare.

Many people do not belong in college and learn next to nothing, but go because
they're shoo'ed along into it and the universities are in on the joke, and in
on the money-making, and undergoing a drastic reduction of standards as a
result.

Some data on just how bad higher ed is getting, from 2017:
[https://medium.com/@simon.sarris/higher-education-
erodes-a7c...](https://medium.com/@simon.sarris/higher-education-
erodes-a7c9983692e0)

~~~
rchaud
Many people also do not belong in an Engineering program, and that's why the
101 classes are designed to weed people out. That system already exists in
higher education. At my (liberal arts) school, we have a two-strike policy.
Strike 1 is when you have a sub 2.0 GPA in a semester; that gets you an
academic suspension for 1 semester. You can rejoin only if you retake similar
courses elsewhere and meet a minimum grade requirement.

If you are allowed to re-enroll, you have 1 strike left. Another sub-2.0 GPA
and you're gone.

If the US brought such a generation-transforming policy like this to the
table, the easiest part of it would be to set that minimum standard across all
participating schools. Most likely already have something close to this in
place now.

~~~
bgorman
Anyone with a pulse can get a 3.0 GPA in college. Due to grade inflation a "C"
has become a B. A 2.0 GPA in college is basically straight Fs. In order to
average less than a 2.0 in college I would imagine you would have to not show
up for your exams and refuse to do any assignments.

~~~
PascLeRasc
That's just not true. Have you ever taken organic chemistry, electromagnetics,
or differential equations? They're incredibly hard courses, no matter how you
slice it, and I'm just speaking from experience at a low-to-mid-level school.
The entry-level computer science course at CMU (15-112) supposedly takes
around 40 hours per week to complete homework for. Courses on the pre-med
track will have pretty unforgiving curves too.

------
clarkevans
I love this idea, but perhaps these kinds of financing should be offered by
university endowments or by government funds? In fact, it might be useful to
replace student loans with this mechanism to align long-term incentives of
universities & their students.

This sort of financing might also lead to a better understanding of what sort
of programs are effective. I could see financing being available for
particular programs. Arts would probably suffer. That said, I think humanities
might get a renewed interest -- those who can communicate effectively and
solve problems are the bedrock of traditional business.

Private investors? There are lots of things that work great with private
capital -- I'm skeptical that financing education is one of them.

~~~
barry-cotter
Yeah, let’s prop up the government and hedge funds with attached research
arms. We should ignore the private companies that are already using ISAs, like
Lambda School, to help people get job training to change their lives for the
better and just assume that not for profits and the government will do things
right because they have only the purest motives.

That worked out so well for the taxpayers and citizens of the US with student
loans, and for the students. Giving universities another legal massive legal
advantage over alternative means of education is a great idea. That couldn’t
possibly go wrong.

Sarcasm aside ISAs are not a terribly new idea and universities have tried and
failed with them before, Yale and Purdue, in part because no one in
universities really cares about getting it right. If you don’t get paid more
if you do well and don’t get fired if it’s a catastrophe your motivation is
reasonably limited.

ISAs do need regulation but just presuming non profits and the government will
do it right out of the goodness of their hearts... It’s ignorant.

~~~
fjp
GP saying that it should be offered by the university because then if the
university fails to produce a population of students that can make money in
the job market, they will suffer.

It's an alignment of incentives much like how some people say colleges should
be penalized or on the hook for having a high percentage of students that
default on student loans. It would supposedly incentivize schools not to just
charge students $300k for an education that gets does not prepare them for the
job market.

Personally I think over-aligning these incentives and making college into a
machine to make you a profitable worker sounds brutally dystopian, but
something has to change about the current world.

------
Talyen42
Equity-based student loan funding is way less predatory than debt-based
student loans, in my opinion, but every comment I read screams "slavery" and
"wage-slave".

Of course, both types of funding can be benevolent and/or predatory depending
on how you structure the terms, just like anything else. Unfortunately, our
laws don't do a very good job of educating or warning young adults who are all
entering predatory loan agreements that can't be voided even in bankruptcy.

~~~
jacknews
The answer of course is that society should fund education in the same way as
it does roads, bridges, national parks, security, governance, and other social
goods. With tax dollars.

~~~
rayiner
Our roads and bridges are in shambles, while our universities are the best in
the world.

~~~
dane-pgp
Is that because millionaires are prepared to give large donations to
universities (especially if their kids get a place at the university in
return), while they're not so generous when it comes to funding roads and
bridges which are used by poor people?

------
caddytodaddy
There’s lots of things to reasonably debate about this. This is already an
accepted practice for coding boot camps like AppAcademy, which I attended. At
the time I couldn’t get a good job and was running out of savings. I was an
adult cleaning golf clubs with high school students. Couldn’t get anyone to
even look at my resume. AppAcademy’s application was purely merit based, they
just wanted to know you could solve problems and think. After the program you
pay 15% if your income for the first year, if you could get a job that paid
over 50K a year.

I got in. I remember I was telling some millionaire member of the club what I
would be doing and he told me that he thought that was illegal and they were
ripping me off. I genuinely liked most of the members, but I really wanted to
tell that guy some very rude things.

It changed my life. By the next spring I had a great job I loved that was
paying me way way more than the golfing club. I had to pay 30% of my first 6
months instead of 15% over the full year, which is tough after taxes. Take
home pay was like 45% of my paycheck. But even during that first 6 months I
was making way more than I would have otherwise. I’d do it again in a
heartbeat.

Bottom line, I got a chance I wouldn’t have gotten otherwise. There’s plenty
of ways to take advantage of desperate people. The term could have been
longer, the rate higher. It could turn into a type of slavery. But if these
things are limited in some way they can be a good thing. Especially if they
time out, and are subject to you actually being paid. Then they are better
than most other loans, and the people who you owe have interests that are
slightly more aligned with yours.

That program has changed a bit since I went through. Also, I think the biggest
drawback was I was expecting them to really help me get a job, but it was more
throw us all out there and see who sticks. So, probably much less ideal in
fields without the same insatiable demand for workers.

~~~
cowpig
I'm curious: how much was AppAcademy was responsible for you getting a job?

What do you think your odds would have been if, e.g. you did a coursera track
or followed some online tutorials to build your first app instead?

~~~
caddytodaddy
They didn’t help much at all, but the program was still new. Their support
might be better now, not sure. I do think taking the program highly highly
increased my chance of employment. I would not have made the right choices
about what to take, my pace would have been much slower, and my self
confidence for actually applying for jobs would have been way less. I am
confident about this because I was taking Coursera courses and online
tutorials before the AppAcademy program. Coursera is awesome and I learned
some great stuff. I also realized that I was good at programming, which gave
me the confidence to apply to AppAcademy. But AppAcademy was truly a boot
camp, very intense, and pushed me through everything I needed to get a job.
And I was also contractually obligated to at least try to get a job.

------
neffy
Oh, hey. Somebody just reinvented indentured servitude.

[https://en.wikipedia.org/wiki/Indentured_servitude](https://en.wikipedia.org/wiki/Indentured_servitude)

Good job.

~~~
harryh
Indentured servitude requires someone to work for a particular employer for a
fixed period of time. ISAs do not do this.

Words have meanings. You don't get to just ignore them to make an emotional
point.

~~~
jklm
I think the parent poster might have meant sharecropping. But the point is
still valid.

~~~
harryh
It's not that either.

------
b_tterc_p
I wonder if premiums are higher for women due to increased likelihood of just
becoming a housewife and providing no income?

Correct me if I’m wrong but the anecdote in the front is also a much worse
deal than the table later on. 279/month = 3,348/year. Thats 6.7% of her 50k
salary, which is before tax to begin with.

Tons of other loopholes I’m curious about. Like salary vs other comp?

~~~
saint_fiasco
If they are going to be cynical about it, maybe they should consider household
income instead of just personal salary so they can collect from women who, due
to higher education, can marry a richer husband than they could without the
education.

~~~
b_tterc_p
I don’t think that could be enforceable.

It would also create weird incentives. If two people have these loans, and
they get married... would their payments double?

~~~
dsfyu404ed
It would be hilariously unenforceable because people would just put off
getting married on paper until the term of the payments is up. For couples
with highly disparate incomes people already do this to take advantage of
income caps for state provided healthcare.

------
l2c1928
I'm having a hard time thinking of ISAs as much more than a ridiculously high
interest loan, especially for those who are self-motivated have a high
probability of landing a job after doing X course.

E.g. Lambda school is $20k if you prepay and maxes out at $30k over 2 years,
which is effectively a 45% interest loan. Even if you didn't have the cash (or
didn't want to fork out) the cash, a typical loan taken out today will have a
single digit interest rate.

Personally I'm completely happy with my federal student loan terms for the
$20k or so I have left to pay. I stretched it out to 20 years, pay a 5.5%
interest rate, the interest rate is deductible you make below a certain
income, and barely think of it outside of doing my taxes.

~~~
toast0
I have plenty of friends who took out student loans, attended college with me,
and ended up dropping out and not having lucrative careers for plenty of
reasons. They would have been better served by something like this, since they
wouldn't ever have to pay it back.

In a way, this is a pessimistic bet, and either way you're a winner. If you
don't get a good paying job, you win because you don't have to pay; if you do
get a good paying job, you win because you have a good paying job, so it's OK
to pay a little more.

The details matter though; if the program is really restrictive and everyone
who gets funding ends up with a good paying job, the borrowers are being
exploited and there's likely an opportunity gap: people who could have done
well with the education, but weren't able to access it because the funders
risk model wouldn't let them.

------
ejlangev
Fitting that in a world where all the same old labor fights that were settled
in the past are happening again that someone would un-ironically invent a new
form of indentured servitude.

Makes me laugh at people who think that non STEM subjects have no value.
Perhaps opening a book in one of those non STEM fields once in a while would
help you avoid reinventing things consigned to the dust bin of history without
realizing it.

Nearly but not quite as rich as when ride-sharing companies accidentally
invent the city bus.

~~~
econ102fail
Oh come on! Quit it with the hyperbole about indentured servitude. Agreeing to
pay a lender a cut of your paycheck is in no form slavery.

------
ineedasername
I can imagine so many bad things happening from this. The first thing that
springs to mind are the lawsuits: The term of the ISA in the article is 8.5
years. So you finish that up, and a year, two years after you make tons of
money. The bank sues you, accuses you of sandbagging your earnings potential
by sitting on a profitable project/idea/etc until after the terms of service.
It's securities fraud. That's just to start.

------
indymike
My daughter signed up on an ISA with Kenzie Academy (it's a digital marketing
program in Indianapolis). The terms were the school gets a percentage of her
earnings over $X and under $Y for two years. If she doesn't make $X, then
nothing paid. Contrast that against a $20-$30k in student debt...

Some of the ISAs being done by colleges just look like dressed up student
loans in comparison.

------
llamataboot
Let's scale this up huge, let everyone take part, and have all of society
invest in education and reap the rewards. We can call it "public education"
and even capture the public externalities of having a well-educated
population!

~~~
SkyBelow
And watch the value of the college degree follow the trend of a high school
diploma!

If we offered free college, how long before we start dropping the standards to
earn a degree (for the same reasons we did so with high school diplomas) and
have students waste even more of their lives in extremely sub par education
environments?

~~~
michaelchisari
Why do you think this hasn't happened in Europe?

~~~
SatvikBeri
My understanding is that most European colleges have entrance exams and only a
fraction of people pass. And since entrance is based purely on exams, college
admission is a much stronger signal than in the US.

~~~
screye
I think it is the other way round.

You can easily enroll in any university you like, but can't advance in that
major if held back in the rather difficult weed-out classes.

------
howard941
Are these obligations dischargable in bankruptcy? It seems to fit into the
discharge exception at 11 USC 523(a)(8)(A)(ii) .
[https://www.law.cornell.edu/uscode/text/11/523](https://www.law.cornell.edu/uscode/text/11/523)

------
dariusj18
This is a little too much like The Unincorporated Man for my comfort.

[https://en.wikipedia.org/wiki/The_Unincorporated_Man](https://en.wikipedia.org/wiki/The_Unincorporated_Man)

~~~
ineedasername
This is literally the exact first thing I thought about when I read the
article. I think the book gets a bit too ideological, but the prospect of
buying a stake in someone's future earnings stuck with me as a pernicious side
door into indentured servitude. At the times I shrugged it off as "well, it
won't happen" yet here we are 10 years later...

------
dahart
It’s interesting they talk about it as something different than a loan. It’s
just a loan with good terms, right?

It seems good to have a flexible pay-back schedule, no late fees, and
something that adapts to my situation in case I lose my job.

But the bigger picture is that this kind of thing is allowing tuition to
increase. We don’t really need better ways to finance ballooning tuitions as
much as we need to figure out how to reduce tuitions and get university
funding for people who can’t afford it even with income sharing agreements.

~~~
larrik
Well, a loan ends after you pay back the principal, this only seems to end
after a certain period of time, even if you end up in a great job and having
to pay back 3x or 4x the loan.

Whether this is still worth it depends heavily on whether this shows up on
your credit reports...

~~~
dahart
Great point, the terms might not be great at all. I should have said relaxed
schedule. Agreed, income sharing might not be worth it. Just another reason we
should investigate other ways to pay for education than personal financing,
right?

~~~
larrik
It seems the ones in the article end after you pay off 2.5x the original loan,
at least.

------
La-ang
When is the state going to fund college for its citizens for the mightiest
nation on earth and stop letting Wall Street find innovative ways to rape us
under the hood.

------
leptoniscool
Isn't at least part of the problem the exorbitant high cost of college
education?

This will cause the price of college to spiral higher and higher, since
students can just sign away a larger portion of their future earnings.

I've heard that higher education is free in Germany, even for foreign
students. Couldn't we implement a similar model here in USA?

------
econ101fail
Planet Money did a podcast on this recently:

[https://www.npr.org/templates/transcript/transcript.php?stor...](https://www.npr.org/templates/transcript/transcript.php?storyId=708152178)

------
zaphirplane
How dystopian, and kids this is how the white collar indentured servitude
class come to be. Gave away a Percent for education, another for housing,
another for health insurance ;)

------
instaheat
How does this correlate to interest rates in the market? I am working on a
student loan refinance marketplace and am really looking to make a significant
dent in this problem.

------
pavelmark
Might be practical, but this does feel completely awful and rent-seeking in
the worst possible way.

------
blackrock
Great.. why don't we just call ourselves the new digital serfs?

Definition:

1\. A person in a condition of servitude, required to render services to a
lord, commonly attached to the lord's land and transferred with it from one
owner to another.

2\. A slave.

~~~
Retra
Being free but indebted is not really as bad as being forced to work someone
else's land. I owe my bank a significant sum, but I am able to find work that
schedules both a repayment of that debt _as well as_ a nice profit and
accumulation of assets for myself on the side. That is not possible under
slavery or serfdom. I owe my bank money, but I don't owe them my life, as they
cannot require that I pay them back under such an inefficient and
disenfranchising mechanism.

~~~
blackrock
Most people would say.. duh..

Isn't this obvious?

I think you missed my point, and took what I wrote too literally, without
doing a deeper analysis of what my intention was.

~~~
Retra
Maybe you need to communicate better instead.

------
Bombthecat
Oh boy, another way to increase the share bubble..

------
Cthulhu_
So basically they're taking up a loan but without the legal protections and
obligations of a loan? That's going to end well.

~~~
barry-cotter
It would be very difficult to do worse than non-dischargable debt, like
students in the US get fit student loans. I think you can get rid of an ISA by
going bankrupt as it’s just a loan with a variable repayment schedule
dependent on income. That description elides from the fact that the terms are
not standardised either in terms of caps on amount paid back or the time you
pay back. It should still be dischargeable in bankruptcy though.

------
JabavuAdams
Hey I know, we could package these Income Sharing Agreements (ISAs) together
to reduce the risk of investing in duds. Then we could resell those. I'm sure
the rating agencies would get on board. Tranche the sh _t out of that stuff,
and it 's fun times until we realize that people don't actually have jobs
anymore, and your AAA CISA is dogsh_t. Sign me up!

OTOH... I just went back to university and am getting straight As or A+s after
my first year doing Physics, Chemistry, Biology. So ... investors ... my
trajectory will put me somewhere between Elon Musk and Ted Kaczynski. Who
wants to bite?

~~~
b_tterc_p
I’m amused at the idea of going in as a group with your class. Getting other
students to guarantee your obligations... I can’t quite figure out the natural
consequences for, say a class of engineers or a class of English majors. For
some domains you would expect a certain rate of inability to pay. In others
you would expect a certain amount of income superstars.

------
nukeop
The American society has progressed so far it managed to bring back indentured
servitude, what an achievement.

------
econ101fail
Can you say adverse selection?

------
jacknews
What happens if students sell 100% of their future income?

~~~
econ101fail
I don't think that would be enforceable. Besides, no sane investor would go
for it.

