Are ISAs the Solution to Student Debt?

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0:00:21 Hi, and welcome to the A16Z podcast.
0:00:26 I’m Lauren Murrow, and I’m here with Austin Elred, CEO and co-founder of the Skills-Based
0:00:32 Online School, Lambda School, and Darcy Kulikin, a partner on the consumer tech team.
0:00:37 Today we’re discussing an issue that has saddled much of a generation, student debt.
0:00:42 Student debt currently stands at more than $1.5 trillion, which makes it the second highest
0:00:45 consumer debt category behind mortgage debt.
0:00:50 The national total for student debt is higher than both credit cards and auto loans.
0:00:55 One solution that’s been proposed is income share agreements, or ISAs.
0:00:59 It’s a concept currently in the zeitgeist that’s spring debate across media and politics.
0:01:02 Here’s the idea.
0:01:06 Rather than charging students tuition to attend college, often forcing them to then take out
0:01:09 loans in the process, they go to school for free.
0:01:14 But under an ISA, they are then required to pay back a percentage of their income after
0:01:20 graduation, but only if they land a job with a salary that meets a certain amount.
0:01:23 In this episode, we delve into some of the greater implications ISAs may have for the
0:01:27 future of education, the economy, and more.
0:01:31 We also touch on some of the challenges of ISAs, why they’ve been relatively slow to
0:01:35 gain traction, why some have failed in the past, and why some in the political sphere
0:01:38 are still skeptical.
0:01:44 As we begin our conversation, Austin gives his explanation for why ISAs work.
0:01:49 I think of it as a very, very forgiving type of way to pay for education.
0:01:53 So if the education doesn’t work, basically, you don’t make payments.
0:01:58 So at Lambda School, you don’t pay the school anything unless you get a job in the field
0:02:03 you trained in that pays more than 50K, and if you get that kind of a job, you pay a percentage
0:02:05 of your income for a couple of years, and that’s it.
0:02:07 Put this into context for us.
0:02:11 If ISAs are the future, what’s the big picture potential?
0:02:15 It just doesn’t make sense for a lot of people to attend college anymore.
0:02:20 Things have stayed flat basically since the ’80s, and tuition has gone up basically 3X,
0:02:24 and so that gap is getting bigger and bigger, and it’s more and more risky every day for
0:02:26 a student to go to college.
0:02:30 So there are times when a student will enroll in a school when they’re 18, and they’ll pick
0:02:36 something to study, and when you look at the amount of student debt they’re going to have,
0:02:40 everybody knows from the school to the person funding the education to the government that
0:02:44 that person is unlikely to be successful and ever pay back their student loans.
0:02:50 If you look at most of the student debt, a lot of it is from students who didn’t graduate
0:02:55 or from students who aren’t making enough, and almost all of the default in student loans
0:02:57 comes from those categories.
0:03:00 In the world of an ISA, that doesn’t happen.
0:03:05 Almost by definition, a student who is unable to make payments on their ISA is much, much
0:03:09 less likely to happen than a student who can’t make payments on their loans.
0:03:13 But what it really allows us to do over time is better assess who will end up in the right
0:03:16 career path, do everything we can to get them there.
0:03:19 What do you mean when you say get them in the right career path?
0:03:23 So you walk in on day one knowing that if you don’t get a good job, you’re not paying
0:03:24 us anything.
0:03:28 Everything is driven to making you successful in the career path that you may choose.
0:03:33 It also diversifies risk, and it allows people to do things that they otherwise might not
0:03:34 have been able to do.
0:03:38 If you look at education outcomes, especially if it’s vocational schools where the ultimate
0:03:42 outcome is getting a job, it can be relatively binary.
0:03:46 You either get a job or you don’t, and when you have those things that have a high variance,
0:03:50 it can oftentimes feel really risky for the person entering into that, because if they
0:03:53 don’t get the job, that risk has then been placed on them.
0:03:57 The way that income share agreements work is they’re taking that risk from the individual
0:03:59 and putting it on the school.
0:04:05 Say you have a school with a 75% graduation rate, and then of those graduates, 75% end
0:04:09 up being successful in the job that they train for.
0:04:10 Those are not bad rates.
0:04:14 In fact, most colleges would take those rates any day, but when you look at the tuition
0:04:20 dollars that are flowing into that school, basically 46% of those tuition dollars are
0:04:22 coming from people who are unsuccessful.
0:04:26 So if those people are saddled with loans, there’s no way they’re going to be able to
0:04:27 pay those off.
0:04:32 If you’re talking a private student loan, your interest rate could be 10%, 11%, 12%.
0:04:37 If you’re only making 30%, 40%, 50K a year, you might be financially ruined forever.
0:04:42 The more income has spread, that then makes the financing education through debt that
0:04:43 much riskier.
0:04:46 The winners will win bigger, but the losers will lose bigger.
0:04:49 And to the extent that that’s financed through debt, that just can become a massive overhang
0:04:52 on somebody that doesn’t win coming out of that education lottery.
0:04:56 And one of the important things that economists have realized in the past few years, I mean,
0:05:00 Kahneman and Tversky, they came up with the notion of behavioral economics.
0:05:05 It was basically the realization that humans don’t always act in an entirely rational way
0:05:09 because their downside risk can be so much greater than the upside.
0:05:14 So ISAs are a way of saying, let’s say you have a 90% chance of your education working
0:05:19 out and a 10% chance of you being financially ruined for life, a rational person will still
0:05:21 not play those odds.
0:05:26 So as a school holds the risk, it now becomes 90% chance that somebody is successful and
0:05:30 pays back and a 10% chance that you have to eat those losses.
0:05:34 The school can actually afford the risk in the way that an individual can’t.
0:05:39 And when an individual is de-risked, they can look for more optimum outcomes and not having
0:05:42 to weigh in that downside risk is really, really important.
0:05:47 Are there types of students that ISAs make sense for and don’t make sense for?
0:05:51 Depending on the terms, I think it makes sense for every student.
0:05:56 As the ISAs exist today, they’re only slightly more expensive than upfront tuition at most
0:05:57 schools.
0:06:03 So you can take the risk and say, I’ll pay $20,000 upfront tuition, or if I’m successful
0:06:06 and I get a six-figure job, I’ll pay up to $30,000.
0:06:11 Turns out if you’re successful and you have a six-figure job, that $10,000 delta doesn’t
0:06:12 feel as bad.
0:06:16 And you would trade that for, and if I don’t get a job, I don’t pay anything.
0:06:20 In my ideal world, you only actually pay the school if it’s less than the increase in
0:06:21 your income.
0:06:24 The place where maybe the jury’s still out, or we’re still trying to figure out whether
0:06:29 the economics work is places where there’s much lower variance, is traditional finance
0:06:33 theory would say that’s a place where you should take out debt rather than some other form
0:06:34 of financing.
0:06:37 And so in those instances, which to a certain extent is kind of what college looked like
0:06:42 in the 1950s and ’60s, and that it was much more predictable, and debt was the natural
0:06:45 financial instrument to use then at that point.
0:06:48 But now that we’re at a place where the risk is so much higher, the outcomes are so much
0:06:51 more distributed, income share agreements are having this moment now, because that’s
0:06:55 the kind of population that it really makes sense for.
0:07:00 But I do think it does come back to what is the upside risk, what is the downside risk.
0:07:05 This may not be the perfect example, but say an NBA athlete or someone where if you’re
0:07:10 successful, the upside is millions and millions and millions of dollars, and you could de-risk
0:07:17 that by saying, “Okay, an ISA will pay me 100K for life in exchange for if I’m wildly
0:07:20 successful, I’ll give up 10% of my income.”
0:07:26 And you can use the high potential for upside risk to de-risk it for people and cover the
0:07:27 downside risk.
0:07:30 That’s the kind of financial engineering that I find fascinating.
0:07:32 The easiest way to think about it is just its insurance.
0:07:38 You’re saying, “If something really bad happens, I’m not going to be in really dire straits.”
0:07:43 Insurance is a really good way to think of it, and that’s the instrument we use in similar
0:07:50 scenarios where, “Okay, I’ll pay $100 a month, and I don’t love paying $100 a month.
0:07:55 But if someone wrecks my car and I now owe $20,000 to get a new car, I would like to
0:07:57 not have to pay that, because I can’t afford to.”
0:08:02 For the most people, when you’re talking houses and cars and potential really high
0:08:06 downside risk volatility, it makes more sense to de-risk yourself.
0:08:10 Let’s say you’re right in income to share agreements become more common.
0:08:13 How might that actually shape education?
0:08:18 So what I hope will happen is you can drive the effective price of studying something
0:08:20 that is likely to pay well down.
0:08:25 What I really think is missing in the economy is something that will tell you, “Hey, based
0:08:30 on who you are and what you know, and your talents and proclivities, here is the best
0:08:33 place for you in the economy, and we’re going to help you get there.”
0:08:37 I would imagine that the vast majority of the population could actually end up in a
0:08:41 better place than they are today if they only had any idea what opportunities are available
0:08:43 to them.
0:08:45 Universities don’t really serve that function today.
0:08:49 When you show up at the front door, they’re not handing you a book that says, “Here are
0:08:53 the best majors for you to choose,” and if they did that, then the professors would lose
0:08:54 their minds.
0:08:58 So I hope that it becomes more transparent when you’re a student.
0:09:06 And I think about our economy of human labor being the majority of GDP, 52%, 53% of GDP,
0:09:10 and completely unoptimized, and that’s insane.
0:09:14 Where our biggest asset class that exists, what most of us spend most of our waking hours
0:09:18 do, is not optimized at all.
0:09:23 Education as it is today is this kind of bundled value proposition where it is skills training,
0:09:26 it’s career development, it’s also networking.
0:09:31 What ISAs are really good at doing is they will kind of debundle that, and they will
0:09:37 atomize the different parts of education and take this part around kind of skills development,
0:09:42 training the ability to focus on optimizing and maximizing your long-term income, and
0:09:48 it will make really clear which programs or institutions are optimizing for that.
0:09:53 I think it’s insane that if, for example, there’s a factory that goes out of business
0:09:58 in Detroit, there are all these people that are unemployed, and even if there is huge
0:10:02 demand in other parts of the economy that those people could do, there’s nothing that
0:10:03 matches those two.
0:10:08 There’s nothing that will take an unemployed factory worker in Detroit and get them, even
0:10:12 if there’s a company next door that desperately needs something, there’s no bridge between
0:10:13 those two.
0:10:19 So at a higher scale, I hope ISAs will enable a broader economic clearinghouse where we
0:10:22 can move people to where they’re most valuable in the economy, where they’re happier, where
0:10:26 they’re paid more, and eliminate the friction of doing that.
0:10:31 I think it’s probably the biggest barrier to economic progress that exists today.
0:10:36 Assuming you have this ecosystem that’s built on top of ISAs, then you will have this much
0:10:40 more efficient system that can move people in and out of the workforce and retrain and
0:10:41 reskill people much more quickly.
0:10:47 A critique of ISAs is people say graduates with high salaries might end up paying more
0:10:49 under an ISA than say a traditional student loan program.
0:10:54 Yeah, it’s a trade-off that you have to make for sure, but we offer both upfront tuition
0:11:00 and an ISA, and 98%, 99% of our students pick the ISA.
0:11:04 Because in the scenario where you are paying a little bit more, you’re fine, and you’re
0:11:08 making enough money that it’s not a big deal, and frankly, for us, you only pay it for a
0:11:09 couple of years.
0:11:16 So it’s actually not a big delta relative to if you had $20,000 on the line and you
0:11:20 have no idea whether it’s going to work out and you owe interest on it no matter what.
0:11:23 Yeah, you might end up having to pay a little bit more than you would if you just paid straight
0:11:28 up, but you’re getting the psychological ease of not potentially having that debt hanging
0:11:29 over you.
0:11:30 Most ISAs are capped.
0:11:34 So no matter if you’re making gazillions of dollars, there is a maximum amount you will
0:11:39 pay whether it’s like $20,000 or $30,000 or $40,000 over the lifetime of an ISA, you’ll
0:11:41 only pay X amount of money.
0:11:46 You’re paying for risk protection on the downside, which can have a bunch of knock-on effects
0:11:50 in terms of how you think about your lifetime earnings.
0:11:53 If you’re able to not only take the risk of going to school or going back to school or
0:11:57 taking time away from the workforce, but also thinking about your career over a longer time
0:12:02 horizon because you don’t necessarily have to service debt immediately upon graduation,
0:12:04 that’s one thing that can actually change the dynamics of a career.
0:12:10 Yeah, one of the instances that’s been most fascinating to watch is if, for example, you
0:12:15 took out a loan to pay Lambda School, the loan payments start becoming due immediately
0:12:16 upon graduation.
0:12:21 So we’ve seen circumstances a couple of weeks ago where a student got a job offer for $70,000
0:12:24 and he was saying, “Okay, that’s not a bad job offer.
0:12:28 I can take that,” and we thought he could do a little bit better.
0:12:32 So you might want to turn that down and keep looking at the market because based on what
0:12:35 we’re seeing, we think you could get more.
0:12:39 If you have a debt payment that’s about to come in, you take that $70,000 offer because
0:12:40 you have to make those payments.
0:12:43 In this circumstance, he waited a couple of months.
0:12:49 We waited longer to get paid, but this particular student ended up getting a job for $240,000.
0:12:54 So a massive, massive difference in income just because he had the psychological ability
0:13:00 to wait a little bit and to pick the actual optimum outcome for him as opposed to optimizing
0:13:04 for, “I’ve got these payments that I need to make that are going to be due no matter
0:13:06 what my life looks like.”
0:13:07 The financial ability to do that too.
0:13:12 It’s psychological and financially, it’s freed him or her to make that better decision.
0:13:17 We all know these people that graduate from university, they take the job in investment
0:13:20 banking or something that’s going to give them a high cash component for three years
0:13:23 because they want to pay off their student debt, and then at that point, they’re going
0:13:24 to go do what they really want to do.
0:13:29 That’s this common thing that you see amongst graduates all over the US, and income share
0:13:35 agreements can mitigate that and it can change the immediate incentives you have upon graduation.
0:13:39 We’re seeing those incentives play out at a broad scale.
0:13:44 People are starting families later, they’re not buying houses, they’re not starting businesses.
0:13:47 My combinator is trying to do a study right now that determines how many people would
0:13:50 be starting businesses if they didn’t have student debt.
0:13:55 If you have $1,000 a month in debt payments, it becomes really difficult to start a company.
0:13:59 So you’re saying the impact of ISAs may extend beyond the issue of student debt.
0:14:04 I think a lot of the reason that people get excited about ISAs is because of the second
0:14:05 and third level effects of it.
0:14:10 The ISAs are like the building blocks, but then you do need this robust ecosystem built
0:14:11 on top of it.
0:14:14 I think we’re in the early days of building that ecosystem right now.
0:14:16 What else is in the ecosystem?
0:14:21 If you think about ISAs broadly, there’s places where you can use ISAs beyond skills training.
0:14:25 You can think about it as I can move you from place A to place B and pay for that and take
0:14:30 those upfront costs and then take an income share agreement on the back end and that’s
0:14:31 the way to finance that.
0:14:35 Right now, mentorship exists in this informal, nice people do it type thing, but you can
0:14:37 think of a way where that gets much more formalized.
0:14:41 There’s tons of value propositions that can be layered on top of income share agreements
0:14:43 that I think people get very, very excited about.
0:14:49 I’ve seen things go as far as an ISA for immigration, where we’ll pay for all of your
0:14:54 legal fees, we’ll do everything that we can, and then if you end up in a certain country
0:14:58 where you’re making way more money, you pay a percentage of income for a few years.
0:15:02 But net is going to be more than you were making wherever you were and you can create
0:15:03 a new life.
0:15:08 The design of it is so important, you really have to consider the details when structuring
0:15:09 it.
0:15:11 You’re 100% right that the devil’s in the details.
0:15:15 In theory, you could make an ISA that makes a lot of sense or you can make an ISA that
0:15:18 makes no sense whatsoever.
0:15:25 My hope is that Azure is more competition in the ISA space and as there becomes better
0:15:30 regulation, more regulatory guidelines, more repayment history on these things, we can
0:15:33 start to figure out what the optimum rate is.
0:15:36 Right now, it’s a little bit up in the air.
0:15:40 When we started, we were basically guessing about what repayment rates would be, and we
0:15:44 created terms that made sense in this imaginary model.
0:15:48 A loan has a par value, it has an interest rate.
0:15:53 You know what payments are going to be coming in every month, and then if they don’t come
0:15:57 in, then you call that a default and you report it to the credit bureau.
0:16:02 With an ISA, there are times when a payment is not coming in and that’s okay because it’s
0:16:04 built into the agreement itself.
0:16:06 In an ISA world, that’s actually not a default.
0:16:10 That may be exactly what the instrument intended for.
0:16:15 The entire ISA market today is maybe a couple hundred million dollars a year.
0:16:19 It’s not big relative to basically any other asset class, whereas student loans are in
0:16:21 the trillions.
0:16:26 You bring up a good point in that ISAs, though they’re getting a lot of buzz in politics
0:16:31 and in the media, are still a relatively small percentage of schools that are actually pursuing
0:16:32 this.
0:16:34 Why aren’t they gaining more traction?
0:16:39 As a school, today you will make less money with an ISA than you will with a loan.
0:16:45 The way the ISAs are structured today, if my upfront tuition is $20,000, I’m actually
0:16:50 not planning to make $20,000 on average from an ISA, and I might have to wait a couple
0:16:52 of years for that to happen.
0:16:57 It’s actually a worse deal for the school in many cases, but the important flip side
0:17:04 of that is it opens up access to students who wouldn’t otherwise be your students.
0:17:10 Lambda school is based on saying, “What if we increase accessibility to the point where
0:17:13 basically anybody with a laptop can attend?”
0:17:17 Now there are millions and millions of people who wouldn’t be willing to take the risk
0:17:22 upon their own financial future to go to a code school, and we say, “Try it out.
0:17:24 See if it works for you.”
0:17:27 If it works for you, you’re going to pay us back, but you have a great job now, so it
0:17:29 all works out.
0:17:35 But the cost of capital is high enough, and they’re different enough from loans that you
0:17:39 on average expect to make less.
0:17:42 The reason that so few schools are doing it is because you really have to design the
0:17:45 school around making that work.
0:17:52 Do you think then that ISAs work well for vocational schools and coding schools, but
0:17:55 the jury’s still out on more traditional higher education?
0:18:00 One of the ways they’re being used in traditional universities, which is interesting, is as a
0:18:03 tool to help people stay in school.
0:18:07 The biggest problem that all the universities deal with is retention, retention, retention.
0:18:11 A university looks at how much financial aid they have.
0:18:14 Some is from the government, some is internally.
0:18:17 And you can pretty well identify the students that are going to need that student aid or
0:18:19 they’re going to drop out.
0:18:25 That student aid is not enough to cover everybody, so they’re people who it’s basically either
0:18:29 they’re going to drop out of a university or you’re going to give them an ISA.
0:18:35 So even if you don’t get full tuition value dollar on the dollar, it’s better to have
0:18:39 those students pay you maybe it’s 90 cents on the dollar, maybe it’s 75 cents on the
0:18:42 dollar to allow them to not drop out.
0:18:46 Obviously, that approach is different than a vocational school like ours that is built
0:18:49 in such a way that you don’t pay unless you get a job.
0:18:53 There’s a bunch of things probably throttling the ISA market right now.
0:18:56 I think regulatory uncertainty is probably one of those.
0:19:01 The investor side likes to invest based off of data and they like to invest into things
0:19:02 that are very predictable.
0:19:06 The nature of ISAs is that they just take years and years and years to really build out that
0:19:07 data set.
0:19:13 So I think the nature of ISAs is just something where it’s destined to grow relatively slowly
0:19:16 just because the capital markets don’t unlock without predictability.
0:19:22 Not to mention the fact that if you’re a university, your COGS are so high that you can’t create
0:19:25 an ISA with a two-year repayment window.
0:19:30 They’re all eight years, 15 years, so that’s going to take a very long time to know what
0:19:32 the repayment predictability is like.
0:19:36 So the number one thing holding us back from creating a bigger data set is they’re just
0:19:41 fundamentally aren’t enough ISAs to get the capital in so you can watch the data roll through.
0:19:45 If you look at the history of lending, it was very similar.
0:19:47 Nobody knew what the right interest rate would be.
0:19:53 Nobody knew how to securitize loans and turn them into a bond and start selling them.
0:19:58 Today, there are trillions of dollars that are looking for returns, but they have to
0:20:03 be very, very sure returns before you’ll put those trillions of dollars in.
0:20:08 So our hope is that we can make that data happen faster and bring down the risk faster.
0:20:12 Can you bring up an interesting point in that ISAs, they’re very buzzy right now, are not
0:20:14 a new concept.
0:20:19 People have tried this before, maybe failed, what are you doing differently?
0:20:24 The most popular experiment with ISAs was done by Yale in the ’70s.
0:20:28 And they did it in a very interesting way, which was they said, “Okay, this class will
0:20:34 cost us $10 in tuition and everybody’s going to pay a percentage of their income until
0:20:39 we’ve reached that amount plus a little bit of interest,” but it was as a pool, not as
0:20:40 an individual.
0:20:45 And it was very explicitly, “Once we’ve hit that amount, then everybody’s done,” not
0:20:46 an individual ISA with a cap.
0:20:53 It was the cap for a class, which feels much worse if you’re a high earner.
0:20:55 And so that actually didn’t work.
0:20:59 Importantly, they also gave people the opportunity to buy out early.
0:21:02 So not only did they structure it as a class, and there was this rate of return that the
0:21:07 class had to hit as a cohort, but also they gave people the ability to pay, I think it
0:21:13 was like 150% of the cost of their tuition, so the people who would have been the really
0:21:16 big earners later on in life had the ability to buy out early.
0:21:19 And then obviously, people who weren’t doing well were paying a smaller percentage of their
0:21:23 income, so it really got burdened on this middle class experiment.
0:21:27 And so I think the lesson from the Yale experiment, which I think is the lesson of all ISAs in
0:21:30 general, is that design is really, really, really important.
0:21:31 All financial instruments in general.
0:21:32 Yeah, exactly.
0:21:36 It’s like, are you giving people the option to opt in or opt out, and when is that happening,
0:21:38 and how is that creating ad for selection in your pool?
0:21:41 How is that changing everybody else’s burden?
0:21:42 These things matter a lot.
0:21:47 And so I think ISAs are extremely exciting, the conceptual level, but I think also whether
0:21:52 it’s the Yale experiment or there was a series of companies in the 2000s and the early 2010s
0:21:57 that came and went and they were using ISAs, but they didn’t get those details right.
0:22:04 I think another big difference between ISAs today versus ISAs in the early 2010s and in
0:22:11 the past is most of the ISAs today are used in vehicles that are meant to shift your income.
0:22:17 Sometimes referred to ISAs is like selling an out-of-the-money call option against yourself.
0:22:21 So you’ll pay, but only in a circumstance where your income changes so much that you
0:22:23 don’t care.
0:22:27 In the past when it’s just been, hey, anybody can get an ISA, there’s the selection bias
0:22:32 of why would I take out an ISA if I can take out a loan?
0:22:36 But when tied to an educational institution, the reason you take out an ISA as opposed
0:22:41 to a loan is because the institution is promising to shift your income or you don’t pay, which
0:22:47 is very different than just a raw ISA to pay for a car repair or something like that.
0:22:51 They’re not lending you dollars, they’re lending dollars to a school that’s going to
0:22:52 shift your income.
0:22:57 Which is one of the things that was new about this generation of income share agreements
0:22:59 that didn’t exist in the previous generations.
0:23:02 So I want to get into the political spectrum a little bit.
0:23:07 So the student debt crisis is something that has gotten a lot of attention in the media,
0:23:10 particularly leading up to the upcoming election.
0:23:15 In June, the members of Congress sent this letter to Secretary of Education that read,
0:23:20 in part, ISAs carry many common pitfalls of traditional private student loans with the
0:23:24 added danger of deceptive rhetoric and marketing that obscure their true nature.
0:23:25 What would you say to skeptics?
0:23:31 A world of ISAs I think would be demonstrably better net net than a world of the existing
0:23:32 student loan arrangement.
0:23:38 I’ve spent a lot of time on Capitol Hill talking to Congress, Congress people and senators
0:23:40 on both sides of the aisle.
0:23:45 And what I’ve generally found is just a lack of understanding and a curiosity and kind
0:23:50 of just a fear and skepticism that’s probably healthy of, hey, there’s this new financial
0:23:55 instrument and one of the reasons we’re pushing so hard for regulation in the space is because
0:24:00 it’s not hard to imagine an ISA that would be predatory, right?
0:24:06 The same way if there were no lending regulations, there are a million different ways that you
0:24:07 could abuse loans.
0:24:12 You could say, this loan has a 9,000% interest rate, but you get your car today.
0:24:14 That’s not a win for anybody.
0:24:19 So I haven’t seen anybody abusing ISAs, but I think politicians are skeptical.
0:24:22 What the Department of Education is saying is let’s look at this deeper.
0:24:28 So similarly, we still at the federal level haven’t seen that data yet.
0:24:29 We haven’t seen what the returns are like.
0:24:32 We haven’t seen what will happen to student repayment.
0:24:35 We haven’t seen what the burden is like.
0:24:40 We haven’t even created rates as the federal government for what ISA repayment ought to
0:24:41 be.
0:24:44 So I think it makes sense that there’s skepticism.
0:24:47 Let’s say someone completely wipes out existing student debt.
0:24:50 Does that affect the outlook for ISAs at all?
0:24:54 Well, if you wipe out the existing student debt based on the way we’re pacing, we’ll
0:24:58 be basically where we are today in about 10 years.
0:24:59 That’s depressing.
0:25:05 So you can wipe out the student debt, but the bigger question is who pays for the education
0:25:07 and how?
0:25:12 And is it just the federal government will now make all university tuition free?
0:25:13 Which I suppose is an option.
0:25:15 I’d be shocked, but that’s an option.
0:25:18 Even in that world, there’s still probably a place for ISAs.
0:25:22 I’m from Canada and healthcare is free, but there’s still four fee medical service.
0:25:25 One of the things that’s really interesting is one of our bigger markets right now is
0:25:26 in the EU.
0:25:30 And in a lot of countries, there’s free education, but it takes a long time.
0:25:31 It’s low quality.
0:25:35 And a lot of our students are saying, even though I have the opportunity to go to college
0:25:40 for free, Lambda School is still providing a better return because it gets me the things
0:25:41 that I need.
0:25:47 Getting into the career faster and our ISA in the EU is 10% for four years.
0:25:53 And so we can make everybody’s income, I think, 10% higher than it would be at a university
0:25:55 over the same lifetime.
0:25:58 It makes sense that even if there’s a free option, there would be a premium option that
0:26:01 would exist that would attract a certain segment of the population.
0:26:05 The fact that you’re offering an ISA is a signal that we believe we can fundamentally
0:26:09 change your outcome in a way that’s a delta to the free system, right?
0:26:11 Could there then be unintended consequences?
0:26:18 To the extent that ISAs become dominant majority exclusive way to finance education, the entire
0:26:23 education system then will reorient itself around this idea of maximizing future income,
0:26:26 which for a lot of students, that is what they want.
0:26:29 For some students, that is not what they want.
0:26:34 And so you would have these knock on secondary effects of income is the thing we can measure.
0:26:38 It’s the thing we can optimize against with this financial instrument.
0:26:44 There’s all kinds of other value being created within the current educational system and
0:26:50 where and how those things would slot into this new different world of exclusively ISAs
0:26:51 is an open question.
0:26:56 So I think when we talk about secondary effects of this world, I think that is probably one
0:26:57 that is worth paying attention to.
0:26:58 Agreed.
0:27:00 We talked about immigration earlier.
0:27:03 Is there potential for this model to play out in fields beyond education?
0:27:08 I think about the excitement around ISAs and education is one big piece of it.
0:27:14 The idea of extending it out into other layers of the educational sphere is exciting, but
0:27:16 more unproven.
0:27:18 And then you trace it out farther and farther and farther.
0:27:22 And you have this version where you can be using ISAs for all these other things.
0:27:27 So whether it’s immigration, whether it’s diversifying risk amongst athletes and artists,
0:27:29 which is another use case that people are talking about.
0:27:32 You can also think about how that plays out in larger and larger contexts.
0:27:38 Where IPOing cars or IPOing pieces of art, there is this trend towards more and more
0:27:40 securitization of different types of assets.
0:27:45 And so it makes sense that the ability to finance advancements in human capital would
0:27:47 naturally tend towards some version of that.
0:27:49 Well, thank you so much for joining us.
0:27:50 Yeah.
0:27:51 Thanks for having me.