Thoughts on Income Sharing Agreements
Must capitalism + education = exploitation?
In ancient times (2012-2018) we thought deeply about this hard problem at the coding bootcamp I helped start and run for 6 years. We really believed that this equation was NOT a physical law, and juggled idealism and pragmatism in order to fund and operate the school and deliver on our promise to students. We were on a mission, and despite what some public folks thought (and other bootcamps appeared to want), our mission was NOT "extract as much cash as possible from students". We really cared and invested our blood, sweat, and tears into trying our damndest to deliver on our promise.
It turned out to be an extraordinary journey through the universe of incentives alignment, financing, higher education examination, PR, emergency crisis management, and more.
One thing I see and hear a lot about these days is income sharing agreements (ISAs). I wanted to share a bit about this topic from my vantage point and also provide some color on where the industry has gone.
Running a school is expensive
If I could travel back in time and tell myself one thing in 2012, it would be: a school is not a software company. Simply trying to put a school online, and tweak the ratios of student to teacher, are not enough to give it the financial attributes of a software company.
Education companies can have technology, but that technology is almost never something that makes the business behave like a software business.
As mentioned, the primary cost is headcount. There are other costs, but they are negligible at scale. You can deploy technology to help alleviate some of the burden, but at the end of the day, there is a certain number of people you need to hire in order to serve more students. Want to enroll X more students? You'll need ~X/N more instructors.
At scale, this really, really matters.
Aligning Incentives
It turns out, that aligning incentives is the Name of the Game in coding bootcamps. Without it, the equation quickly leads to exploitation, especially when operating at scale. Unlike a SaaS business, your COGS is a meaningful percent of your cost, which grows with your customer base. While we were a 1:1 model at first, we quickly realized how unscalable such an approach was - and customers even expressed a desire to experience more group learning, which led us to incorporate more of a one-to-many approach.
Regardless, in both approaches, your primary mechanism to improve your margins as an education company is to reduce your COGS, not your OpEx.
And your highest line item in COGS is headcount of instructors.
Faced with such a challenge, what's the most educationally effective, and cost effective way to reduce your instructor cost?
You hire your own graduates as instructors.
Actually not as terrible as it appears
This actually makes sort of sense.
Recent graduates are best positioned to explain complicated concepts to newbies. Data bears this out, as does student and instructor testimony. As does lots of educational research.
It's also very hard to find really great seasoned instructors, especially at scale. It's essentially a hiring problem. Which means you have to have people at the company responsible for interviewing, accountable to outcomes and metrics, and enough capacity to get it done.
But, you can imagine the optical challenge of conveying to current (and prospective) students that the price of the program stays the same while the instructors are paid less than the experienced folks of the past.
This is one area where, I believe, much of the public is mistaken about what they want. They think they want experienced practitioners, but for 90% or more of the educational experience, you actually want to be taught by someone who just learned the material. But there is a limit to how much you can educate the public. Good luck with that.
(A related and important topic that I do not have time to go into today: how do you retain the great instructors, provide them higher leverage ways to invest their time and energy, without growing your COGS?)
Pricing Experiments
When you have an intense program that requires human beings to serve customers, you have to set a high price tag. Setting a high price tag also informs customers about what type of experience they can expect. A high priced product or experience attracts buyers of means.
When we started, we didn't offer external financing at all. We literally took on the debt ourselves. If students couldn't pay, we gave them payment plans. That meant we fronted the cash ourselves to pay the instructors, develop the curriculum and software, and try our best to get them all jobs. When we were small, this actually worked just fine.
But at scale it obviously breaks down. A dropout rate of 5% for 10 students is easy to absorb, but the same dropout rate at 100 or 1,000 students is not so easy. So we had to find other ways.
We tried a bunch of stuff. We tried partnering with companies like Affirm to offer 3rd party financing. We explored accreditation to qualify for federal financial aid. We explored selling our payment plans as a debt instrument to third parties.
And we experimented with ISAs.
What are ISAs?
Income Share Agreements (ISAs) emerged as an alternative to student loans, allowing students to pay a percentage of their future income instead of upfront tuition. ISAs gained significant traction in coding bootcamps, which promised to align school incentives with student outcomes.
It sounds great, right? You pay based on the outcome you achieve, not up front. It aligns incentives - if the school doesn't get paid unless you get a job, then they are damn incentivized to ensure you're job ready. It offers students an extremely flexible payment structure. And payment caps limit the amount students will have to pay when they do get employed.
It's also attractive because it offers access to underserved students. They don't require a high credit score. You can imagine the personal and cultural importance of this fact at the time, and even today.
And they aren't a loan - or at least, it doesn't feel like a loan. This psychological benefit to customers was a big deal! No debt if you don't succeed. Sounds great!
Ehhhhh
Despite these clear benefits, ISAs at our bootcamp, and more publicly in other bootcamps you may have heard of, often led to problematic outcomes:
Overhyped placement rates - deserving of its own standalone essay
High cost to successful students
Opaque terms that were difficult to communicate or understand (how many jobs do you have to apply for? How do you prevent people from going through your program for free and never paying, and waiting until the end of the term period to apply for a job? Hard problem.)
Reputational harm from lawsuits, scrutiny from regulators (even if no foul play)
These are all important downsides. But there's one last downside that matters most.
Imagine you're running a company with a high COGS, idealistic yet pragmatic staff who care about the students, serving customers who are attempting to authentically change their lives by upskilling themselves using your program. You're spending money hand over fist, not on foosball tables and xboxes, but paying your instructors.
And you've adopted ISAs as your primary financing vehicle.
Skin in the game and increasing dropout rates
If students drop out before they're able to get a job, no amount of incentive alignment will obscure the fact that the cash you invested to serve that student is a loss.
Every student that drops out without having paid is a loss. Every single one.
We saw dropout rates spike hard when we adopted ISAs. It happened so quickly that we hit the brakes.
We lost a lot of money on it. So have others. You can imagine the squeeze.
When students don't have skin in the game, at coding bootcamps, they drop out at a higher rate. We were operating at scale, with literally thousands of concurrently enrolled students. We saw the data. It was clear.
And we've seen that data bear itself out with other schools as well. ISAs lead to higher dropouts, which leads to a financial loss for the school.
And when the school is feeling the financial squeeze, that's when the ol' exploitation term starts to get thrown around a lot more.
Tuition Reimbursement
We moved away from ISAs to Tuition Reimbursement. Students were required to pay up front - or partner with a financing option that supplied us with a "promise to pay" that was backed by cash that we could book.
That was 2018 and then I left, and the school was sold to a competitor, who itself was eventually sold to a bigger higher education company that I believe is now defunct. So it's all ancient history.
What about other non-coding industries?
Given this history, should you remain open to ISAs in a different context — say, trade schools — where student profiles, program durations, and job market dynamics are different? Can ISAs be responsibly deployed as a tool for equitable access in vocational education?
I think yes, with caution and structure. ISAs may have a more promising role in trade schools, if designed responsibly:
Stronger alignment with outcomes: Tracking placement rates closely and honestly. A bit of research tells me that programs like diesel mechanic training have reported 96% completion and 98% placement. This shows that high-certainty career pipelines can be supported by ISAs
Lower income ceilings reduce overpayment risk: One common complaint about successful students who relied on ISAs was that they paid wayyyy more than felt fair. Most trade careers (e.g. HVAC, carpentry, pharmacy tech) have more modest, but stable, incomes, which could naturally constrain this issue.
Investor / company fit: In some sense, an at-scale developer bootcamp was just a terrible fit for venture capital. Because it doesn't have the dynamics of a software or technology company, 10xing, 100xing growth is much more financially constrained. Or maybe it looks more like hardtech, or something.
Have regulatory frameworks matured? If ISAs are now more clearly recognized as credit products, perhaps consumers are more protected with clearer terms.
My Takeaway
It's very hard for me to get past the scar tissue that ISAs have from my bootcamp years. I suggest any trade school attempting to leverage ISAs should:
Be radically transparent with students about repayment terms
Cap payments clearly and conservatively
Align program quality and job placement rigorously to outcomes
Avoid expectations of scaling fast without acknowledging the risks to student outcomes
There's other scar tissue as well. Selecting and managing instructors, curriculum development, marketing challenges, subscriptions vs. tuition, and more. But those essays will have to wait.