Coding bootcamps have been quick to adopt income-share agreements, or ISAs, as they work to figure out funding models amid a fast-changing industry.
The model typically entails students paying back a portion of their salary after completing a program and landing a job, rather than paying tuition up front. And even as questions remain about whether or not this unregulated financing model will work in the long run, more alternative education providers—and even some universities—are giving ISAs a try.
Lambda School is one of the venture capital community’s latest bets. Today, the San Ramon, Calif.-based online coding school has raised $30 million in a Series B funding round, led by Bedrock Capital, to grow its offerings. Vy Capital, Google Ventures, GGV Capital, Y Combinator and Sound Ventures also participated in the financing.
With the added funds, Lambda School also announced it will be adding courses in cybersecurity and medicine. In an interview with EdSurge, co-founder and CEO Austen Allred says the company plans to offer short-term programs in areas such as nursing—a field that is more regulated than the company’s existing training courses in coding, data science and web design.
That expansion may not come organically. One route the company is exploring is to “purchase a [nursing] school and gut it and strip it out,” Allred shares. Such a program would remain online, and the school would work with local hospitals as employer partners.
The latest fundraise will also go toward building out the company’s hiring network, which means expanding Lambda’s sales staff to bring in employers to meet with—and potentially hire—Lambda graduates.
Securing successful employer partnerships is key to Lambda’s primary selling point to prospective students: income-share agreements. Under this financing arrangement, a student does not pay any tuition cost until they complete the program and land a job and salary of at least $50,000 per year. After that, students pay the company 17 percent of their income for two years. Payment is capped at $30,000, regardless of how much a student makes.
Students at Lambda School can also choose to pay an up-front tuition cost of $20,000. (Students who take the ISA and earn a high salary could pay back more than the upfront tuition cost.) Allred estimates that around 98 percent of students choose the ISA.
That means in order for Lambda to run, students must get hired so they can pay their tuition. So far, the company claims 83 percent of its graduates have been hired within 6 months with a median salary of $70,000.
“If we enrolled a bunch of students and didn’t care about their outcomes, we would go bankrupt,” says Allred.
Lambda School works with Leif, a company that helps schools design ISA programs and manage payments. According to Allred, Lambda issues and owns each of its student’s ISAs, so that a graduate’s ISA payment (after landing a job) goes directly to Lambda.
Still, running on an ISA model requires capital upfront to keep its operations running and pay its bills (and instructors). Since its launch in 2016, Lambda has raised nearly $49 million, which allows the company to pay for students to attend before the returns on the ISAs come back to the school.
ISAs have often been positioned as a relief to the $1.5 trillion student loan crisis, and a better alternative to private student loans. But the ISA industry remains largely unregulated in the U.S., leaving room for both skepticism and unfair practice.
Some have pointed out that the ISA model could prioritize students who are expected to succeed, and potentially discriminate students based on stereotypes and what they study. The New York Times reported: “The school is incentivized to only enroll motivated students who won’t drop out; it is incentivized to successfully teach them the skills they will need on the job; it is incentivized to find them a job; and it is incentivized to make sure they are a success once they’re on the job because the school relies on employers to keep hiring its graduates.”
Allred says he would like to see rules established around ISAs. “I would like for there to be some solid regulations around how ISAs work and what is permissible and what is not,” he says. “Right now, there is no law, so we are writing our own rules based on what we think makes sense for the student.”
Advocates for income-share agreements suggest this financing model aligns the incentives for both schools and students to get good outcomes (and jobs). “If you look at predatory for-profit schools, they were built to enrolls students and it didn't matter what happened after,” says Allred.
Lambda School is also casting its sights internationally with this latest fundraise. The company began offering its courses in Europe in January, and announced today that it is also expanding into Canada in the first half of 2019.
The latest funding round values Lambda School at $150 million.
