Business

Students pay for this tech school with a share of their earnings. Could it be the future of college finance?

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The Silicon Valley based Lambda School teaches information technology skills online and charges students a share of their future earnings based on their income.
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Bloomberg

Is it possible to equitize human labor? For years people have talked about the idea of selling shares in one’s own talent, in the hope of attracting funds and assistance from others. Now it seems that this idea is happening at scale, through the Lambda School.

The Silicon Valley based Lambda School teaches information technology skills online, and it charges zero tuition and offers stipends to select students. The deal is that students pay back 17% of their income from their first two years of work, if earnings exceed $50,000 a year, with a maximum payment of $30,000. Students who don’t find jobs at that income level don’t pay anything. Students may also opt to pay $20,000 in tuition upfront and keep all their future income.

There are reportedly about 1,300 students enrolled, and the company has raised almost $50 million. The early job placement record is impressive; 86% of graduates have jobs within 180 days of finishing the program, at a median starting salary of $60,000.

It is too early to judge results — how would these students have fared without Lambda or in a less strong job market? — but this kind of effort is an economist’s dream come true.

The key benefit of equitization is that outsiders have a much greater incentive to invest in the students. If a company owns a share in your future income, it has an incentive to train and place you well and to connect you with the proper social and business networks. That could be a big leg up for many workers. And students who receive stipends have additional liquid funds, helping them to pay the rent or meet other expenses, including further investments in training. This is especially valuable for smart, hard-working students from lower-income backgrounds.

At a time when human talent is so often the binding constraint, and amid so many calls to improve the educational system, these kinds of ideas deserve further attention.

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The approach is a variant on the basic idea that a university could offer free or reduced tuition to students in return for a share of their future income. Purdue University in Indiana, for example, allows some students to enroll in so-called income share agreements to pay back their tuition. Another variant allows graduates to use such an arrangement to pay back their federal student loans. With equitization, however, higher earners pay back more and lower earners pay back less. That seems more fair for both students and universities; it cushions the risk for the former, and gives the latter an additional incentive to do a good job teaching.

To some people, the notion of promising parts of your future labor income to someone or something else sounds repugnant, almost like a kind of slavery. Yet is it really so objectionable? Unlike slavery, these deals are voluntary. Anyone who has written a book or made a film is familiar with the idea of offering some share of the future income to an agent, in return for assistance. And of course corporations, many of which rely on individual talent as their main asset, sell equity in themselves.

To be sure, there are problems with the idea of equitizing human capital. For instance, what if less talented, less hard-working individuals turn out to be the most likely to sign away part of their future income? That creates a problem that economists call “adverse selection.” This is a real issue, but it hasn’t stopped companies from selling equity and start-ups from selling venture capital shares. As for the students, due diligence and talent measurement may suffice to identify enough good students with bright prospects.

There are also genuine questions about how far this model can be extended. The demand for labor is robust in information technology, but would a similar system work for philosophy professors or prospective musicians? In both cases, incomes are undoubtedly lower, motivations nonpecuniary and the chances for real success more remote.

Note also that we already equitize each other’s labor in many non-explicit, noncorporate ways. If two economists write a paper together, for example, each is tying his or her fate somewhat to the other. And if two people in business decide to share networks or trade favors, each has a stake in the success of the other.

Can a more formal, commercialized version of these ideas help make the educational system more effective? Let’s hope so.

Tyler Cowen writes a column for Bloomberg.