Lambda School is reselling their students' ISAs to investors | Hacker News Reader

Lambda School is reselling their students' ISAs to investors

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32 pointssaadalem13 comments

Is this a bad thing? Can someone expand on the implications of this? I would think that it doesn't matter who owns an ISA.

I can see a couple of negative interpretations:

1. Lambda school has lost faith in their students or never had faith in the first place. As a result they're trying to exit the ISA positions.

2. This is too similar to CDOs, which have caused a financial crisis in the US before.

3. People are already worried about student debt, and this is a very similar type of debt.

4. Selling ISAs to big bad hedge funds is unsavory, for some reason. People who were too poor to afford proper education now owe money to the rich people running investment funds - that sort of thing.

FWIW, I'm not really biting on any of these arguments. These ISAs take a very long type to pay off, so it makes sense for them to be held by someone with a low cost of capital. Lamda school is in the business of training people and getting these ISAs, they're not in the business of holding on to these ISAs for 10 years (even if they wanted, they're probably not capitalised well enough for this). Holding onto assets for long stretches of time, that's the job of financial institutions and investment funds.

This is just run-of-the-mill finance, really. I wouldn't be surprised if this was the plan from the get-go.

Doesn't it change the incentive structure though? If Lambda only gets paid when students get a job, they are much more incentivized to work towards positive outcomes for the student. If they get paid regardless, then they might as well enroll as many people as possible and care much less about their outcomes?

I think schools like Lambda have a massive role to play in education, the problem is it seems like the vast majority are predatory ( not saying Lambda is, they seem like one of the more honest ones). But if the financial realities of running them means packaging students into CDO's, i fail to see how market forces won't force them all into predatory practices?

True to some extent, but don't investors need some way to figure out what an ISA is worth when they buy it from a school? Assuming they can get access to the numbers, wouldn't that valuation be based on stuff like graduation rates, placement, and alumni salaries?

If so, then if the school ever wants to sell ISAs again, then they have an incentive (at least indirectly) because future years' cash flow will depend on how well they perform on whatever stats ISA buyers look at.

Pardon the sarcasm

Investors would never be fooled into purchasing garbage debt made to look great. And banks would never risk it for the biscuit since the government would never bail them out.

Another way to look at the incentive structure is that they could be driven by volume and not caliber. It depends on how well investors are able to vet the ISAs and if the ones purchasing them are the ones left holding the bag when it goes up in smoke.

The entities purchasing the ISAs will rely on Lambda’s success at getting people jobs to determine how much they’re willing to pay. Lambda has exactly the same incentives in the long term regardless of whether it keeps or sells the ISAs.

I think it depends on the chance that the student gets a job that is either in software engineering, or some job with a salary high enough to trigger the clause in the ISA to initiate payback.

I'm curious as to how legal these income "sharing" agreements are, can they be enforced by US law?

Most likely they are valid contracts and enforceable.

The blowback on this is interesting. If you find out that your bank sells your mortgage obligation to someone else, you don't really care. But if you find out that your coding school sold your ISA obligation you might feel it indicates a lack of trust and therefore be less likely to pay.

It indicates that what they sold you wasn't worth the money and they're fully aware of that.

Real estate appraisal is a regulated profession - get two people to value your house and they'll come up with similar amounts. Ask someone to value an education and the answers will be anywhere between "you could get that for free at the library" through to tens of thousands a year.

Or they need cash now (for scaling, for instance) instead of later.

They don't need to scale, they need to pump out higher quality graduates.

I think they should have to disclose the price they sold them for - would be a great way to get a real valuation on the degree.

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