[hundt]

> Whether or not this counts as “selling” strikes me as a meaningless semantic distinction: Either way, the school receives some money up front and an investor shoulders some of the risk of the ISA not paying out. And either way, Lambda School students don’t know that the school isn’t as incentive-aligned with them as the school’s marketing indicates.

It is certainly not meaningless! Selling an ISA means that Lambda no longer has any financial interest in its outcome. Borrowing against an ISA is completely different; if the ISA doesn't pay out then Lambda goes bankrupt, which is precisely the incentive alignment they claim to have.

[raiyu]

It is selling, because the loan is backed by the ISA. Which means if Lambda can not repay the loan, the loaning company now owns the ISA and can use any sort of aggressive tactics to get the student to repay their ISA.

Just like if you take out a mortgage on a house and fail to pay the loan back, then the bank owns the house.

In this case since the ISA is used as collateral, the company that originated the loan now owns a lien on the ISA, effectively giving it ownership.

Similar to when you lease a car, there is a company that provides the finances for the lease, and has a lien on the car, which means you do not own it. Otherwise you could lease a car for $250/mo, then sell it the next day for $30k, but you can't because there is a lien on the title.

So in this case, while the loan is outstanding, the originating loan company effectively owns the asset used for collateral. Ownership means you have 100% control over the asset, and in this case, Lambda has given away 100% control over the ISA.

It also means that they are not aligned anymore, since they have received financial compensation for the ISA up front, they can default on their repayment of the loan as it doesn't matter because the collateral aren't shares in their company, but just the ISA itself.

[awareware]

I don't think that's quite right. Lambda is taking out loans against the ISA but the only way to discharge the debt is by declaring bankruptcy. If Lambda defaults on these loans the bank will indeed own them but won't be satisfied just taking back the ISA contracts and enforcing them themselves (and presumably, if they default, the ISAs aren't worth what they were financed at anyway). Lambda is still on the hook for the full balance of the debt unless they want to close up and liquidate or file chapter 11.

[hundt]

You seem to think that this "loan" that the investor makes to Lambda School only has to be paid back when the ISAs pay out, and if they never pay out then Lambda School's debt is just forgiven. That would indeed be similar to just selling the ISAs to the investors, but I don't think that's what is described in the article (as Lambda School's current practice). Rather the article says that Lambda School gets a "loan that is secured by students' ISAs" which implies that Lambda School has to pay it back with or without the income from the ISAs.

[raiyu]

Secured by the is the part I focused on. When a loan is secured by something, the underlying asset is what the loan originating company retains after you fail to pay for the loan.

So if I take out a mortgage, and fail to pay for it, the bank gets the house, I am not still obligated to pay the remaining loan amount. Sure there are a few other items that occur in that process, but ultimately the loan is forgiven, of course with some credit penalties and future ability to take out loans. But I am not responsible to continue repaying the loan.

If the loan is secured by the ISA the same thing applies here. Sure there could be other stipulations and without reviewing the contracts there is no way to know, but stands to reason that the more likely situation is that they get the ISA and then can use aggressive tactics to go after the students for collections such as garnishing wages and also potentially charging them an interest for failure to repay. Though the original ISA believe has no interest, that's not to say that late penalties or other fees can't be added in later potentially.

[hundt]

Ah, I think you have a misunderstanding about what collateral is. Collateral is not generally a limitation on the lender's ability to collect the debt. In some specific cases (like certain home loans in certain states) the law adds this limitation but generally collateral is just something the lender can take in the event of default.

To bring up the car loan example you mentioned earlier, if you decide after a year that you don't want your car anymore you can't just drive it to your bank and drop it off instead of paying off the rest of the loan. If you stop paying it they can repossess it but you will still owe whatever is left on your loan balance after they auction it.

[the_watcher]

> Just like if you take out a mortgage on a house and fail to pay the loan back, then the bank owns the house.

I think most homeowners would disagree that when they bought the house, it was actually sold to the bank.

[BlueTemplar]

Sadly, in practice it often was?

[beering]

It's not zero financial interest, but certainly more indirect and less compelling.

If investors in Lambda ISAs are not getting good returns, the value of buying a Lambda ISA will go down. If Lambda can't sell ISAs for a good price, they won't get the operating income they need or will have to shoulder the ISA themselves.

Still, selling the ISA just feels shady relative to the marketing that touts ISAs as aligning incentives.

[hundt]

Selling the ISAs would make it more indirect, but this article is referring to borrowing against the ISAs' future income, which does not make it more indirect.

[akanet]

allred copped to straight up actually selling ISAs in the past (despite denials) as well

[hundt]

Yep, if Austen misled people that's bad. I am just disputing the argument that the later practice of using them as collateral for a loan is financially similar to selling them.

[x0x0]

Why do you find that less compelling? As you point out, even if Austin sold hopes and dreams and/or investor story time for the first two years of ISAs, eventually there will be hard results to model out. So how does that misalign incentives?

[akanet]

The claim made to the student is not that they have some long minded financial alignment with the student cohort in aggregate - it's that specifically, the school does not make any money off the student (individually) until the student has an outcome.

[hundt]

Yes, and that is accurate; borrowing against a student's debt is not "making money" from the student. The transaction you describe does not hedge Lambda's risk; in fact it increases Lambda's risk because now if the student defaults they still need to pay interest as well.

[akanet]

that's a fair enough point, and I suppose I could have built the point more clearly in the article that I feel that the actual transgression is a misleading statement made to a student.

[conanbatt]

The value of the ISA's as sold depend on the company success. The alignment is really the same...