I find it surprising that they sell their ISAs (it seems to be true based on a quick look at this https://www.theverge.com/2020/2/12/21135134/lambda-school-st...).
Doesn't this look bad to prospective students? It implies that they don't think that they'll pay off. Is there a good faith explanation for this?
So they're incentivized to inflate their graduation rates to sell off the ISAs to investors who don't know better, since they need the cash now. Investors are left with a bill of goods: ISAs that will never pay out. Add in some securitization and tranches and baby, you've got a 2008 financial crisis goin'!
At this particular point in time, I suggest this is a vote of confidence.
This is a new asset class, investors are going to dig deep and understand it. They will certainly have access to more data and analysis than the average student.
However, if the government were to start to guarantee the loans and the volume hit an impossible level, and people got used to minimal defaults for 20 years then that would lay the groundwork for the type of disaster you suggest.
(I am not affiliated with labda or any of its investors)
The cash to train students needs to come from somewhere. So in Lambda School's case that's either VCs or some other investors.
Instead of running the entire school on venture capital, which wouldn't make sense (VCs need a huge return per dollar), we use an advance from investors based on the future value of an ISA to offset the cost.
If we work with investors to say that an ISA will be worth $x, we can borrow $x minus interest the same way you would be able to for any other asset.
Of course, that amount needs to be repaid. So it's still completely risk-aligned.
The cash to train students needs to come from somewhere. So in Lambda School's case that's either VCs or some other investors.
This makes sense for liquidity, but ultimately the ISAs are what has to provide the funding (or it's not a viable business).
As the investment terms improve, the portion of the ISA payout spent on training has to go down.
You are correct that the ISAs need to pay out to be an interesting investment, but if you are pricing the ISA to what the investment market will pay instead of what the training costs, it's not exactly a better deal for the students.
Sure, they can decide if the think the deal is worth it to them or not, but they probably aren't the one with the most information about the training spend and value of the ISA.
It doesn't matter particularly to the student, but there is some utility, even from the outside, in estimating how much direct value a school provides and how much of a matchmaking service it provides. Your whole premise is that universities mostly provide matchmaking!
Doesn't that incentivize you to graduate as many students as possible, even poor quality ones, so that you can recoup the costs of as many past ISAs as possible and sell them off quickly?
Otherwise, how does a student that doesn't land a job and whose ISA will never repay fit into this model?