California approves revenue-sharing deals, but with a caveat that will hurt students

On Thursday, the California Bureau of Private Postsecondary Education (BPPE) approved Lambda School, a coding bootcamp, to operate in the Golden State. That of the regulator lambda beef and other coding bootcamps have sprung up based on the model students use to fund their education: the Revenue Sharing Agreement (ISA). As part of the deal, Lambda will offer a product similar to revenue-sharing agreements, but with one major difference that will make the funding tool less beneficial to students.

Unlike a traditional student loan, students who pay for their education using revenue-sharing agreements will not pay a fixed amount each month. Instead, they make payments corresponding to a certain share of their income for a specific period. At Lambda, for example, students using ISAs will pay 17% of their earnings until they’ve paid $30,000 or made two years of payments, whichever comes first.

BPPE contested this last provision of the ISAs. Under the regulator’s agreement with Lambda School, California students’ obligation to pay their ISAs — now called “retail installment contracts” — will no longer automatically end after two years of payments. It won’t make any difference to high-income students who hit the $30,000 cap in two years. But for low-income students, the change equates to a potentially significant increase in lifetime payments.

The Release Clause is essential to the Revenue Sharing Agreement template. One of the great advantages of ISAs over student loans is the transfer of risk from the student to the school. If a student fails to graduate or land a well-paying job, their payments are commensurate with their lower income. If its payments do not fully cover the tuition, the school is responsible for the shortfall. This creates a powerful financial incentive for institutions to provide quality education.

Coding bootcamps, which largely use ISAs instead of traditional student loans, offer a proven path in well-paying jobs. They are faster and cheaper than bachelor’s or master’s degrees and place much more emphasis on career services than traditional universities. In the midst of a pandemic, these primarily online institutions have the potential to play a critical role. At a time when the unemployment rate is over 10%, many people are looking to get a post-secondary education to boost their marketable skills. This is especially true for people with fewer traditional educational credentials, who have suffered the most in the current recession.

Revenue sharing agreements are a key element of this new market. Coding bootcamps and other alternative education providers cannot rely on brand names to attract students like traditional universities can. Students will not automatically be convinced that they are getting a worthwhile educational product. Schools need to build this trust from scratch, and one of the best ways to do this is for the school to take a direct financial interest in the future success of its students.

According to a investigation per Course Report, graduates of coding bootcamps earn a median starting salary of $65,000, a respectable result. But there is a minority who do not complete or find a well-paying job within a few months of graduation, as will be the case with almost any educational program. A traditional college lets these students dry out with the student debt they have accumulated. ISAs protect students by reducing or even waiving payments for low-income students, thereby transferring the financial risk to the school. But with its recent regulatory decision, California has effectively shifted that risk from the school to the student.

The Silicon Valley house has proven surprisingly hostile to innovation. The episode reveals a deeper problem: because ISAs are a new financial innovation, there is not yet a regulatory framework in place to govern them. As a result, regulators enshrine ISAs in decades-old legal frameworks that were never designed for them. Rather than attacking the model, governments should update their rules ensure that revenue-sharing agreements have legal space in which to operate, so that they can continue to offer students a less risky and more flexible option for funding their education beyond high school.

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