[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.