Why We Built a College Powered by Income Share Agreements

Ashu Desai
Dec 23, 2017 · 5 min read
Our pilot class speaking with Kat Mañalac of Y Combinator

In Fall 2014 we began piloting the Product College with a Gap Year program where students paid tuition through their internship earnings. Initially we chose this model to sweeten the deal for students taking a risk on our pilot class. As we took a deeper look at higher education, we began to realize aligning the incentives of students and schools through Income Share Agreements could help systemically fix a challenged industry. That December we held a town hall meeting with our staff and the 11 students in our pilot class to discuss the strategy and vision of the Product College.

Our vision for Make School in 5 years is a free upfront 2 year accelerated college that attracts the best talent regardless of their socioeconomic background. (2014)

The following email served as a basis for the discussion and shares much of our thinking around our decision to use ISAs to power our college. I’m deeply proud of our team and our students for believing in and staying true to our vision. 3 years later we can confidently say we’ve built what we set out to and helped pioneer a movement. Since 2014, dozens of alternative education providers and even traditional universities have adopted the ISA model — the future of higher education looks bright!


Date: December 14th, 2014

Subject: Should we make our 2 year program free upfront?

Body:

ver the past week Jeremy and I have been intensely discussing whether we should change the model of our 2 year program to be completely free upfront for our students, much like the pilot of the Gap Year program. We wanted to get your feedback on this idea, especially feedback from the Gap Year students who are very representative of our future students.

These discussions stemmed from a few sources of inspiration. The Ivory Tower CNN documentary gives a good overview of the problems with the existing higher education system. The system was built over hundreds of years and created a perception that a college degree was a necessity for opportune employment. In order to attract students, colleges competed to build larger campuses and better facilities, all at the expense of the student.

As a result, accessibility of higher education fell and student debt dramatically rose. Total student debt is now over 1 trillion dollars, half or more of college graduates are unemployed or underemployed and have little hope of paying off their loans.

Lenders have no ability to foreclose assets in a student loan, making it a higher risk investment. As a result interest rates are high and there don’t exist avenues to default out of a student loan. Among the plethora of problems with higher education, the student loan debt crisis is the biggest. If we can prove there are models for higher education that allow students to walk out the door with no debt it would serve as a wake up call to traditional universities and spark a trend of cutting costs and tuition.

Marc Andreessen recently tweetstormed about disruptive innovation borrowing from Clayton Christensen’s core thesis, the tl;dr:

“A disruptive innovation gives new consumers access to product historically only available to consumers with a lot of money or skill.

Disruptors offer a different set of product attributes valued only in new markets remote from, and unimportant to, the mainstream.” — Marc Andreessen

We have an opportunity to truly disrupt the higher education market by innovating on business model and providing a higher quality product at a dramatically lower cost. This would significantly increase the amount of impact Make School would have.

Finally, and most importantly, the issue of accessibility is key. Some of the brightest students in the country don’t apply to top schools because they don’t think they can afford it. Although many top schools have generous aid packages for students in need, the high price tag creates a psychological barrier to apply, this was one of the main topics on agenda during the White House education innovation event I attended in DC in January. There is a risk associated with choosing Make School over a traditional university, and that risk is even higher if you need to take out a loan to pay tuition. It’s an order of magnitude easier for a student from a well off family to take this risk, meaning our programs could easily be filled with students who otherwise would be attending top colleges and are likely to achieve successful outcomes anyways.

Jeremy and I are very aware that our environment and parents’ socioeconomic status might be the biggest reason we are where we are, so we want Make School to create avenues of advancement for students who weren’t afforded the same privilege. Making our program free upfront is the best way to make that happen.

The mechanics of making the program free upfront would be similar to this year’s Gap Year, we would generate revenue through student job and contract work earnings via Income Share Agreements. The big concern with this new model is cashflow — we wouldn’t see revenue until the program ends. This would increase our risk and introduce new challenges for the business around financial engineering. We’d likely need to partner with a bank to fund our operating costs in exchange for a share of future student earnings.

Our vision for Make School in 5 years is a free upfront 2 year accelerated college that attracts the best talent regardless of their socioeconomic background. The question we need to answer is whether we want to make it free upfront and accessible immediately. Focus is immensely important for a small startup so it’s risky for us to tackle additional challenges now, especially considering we’re already spread thin. The right strategy could be sticking to a tuition based model now and figure out how to introduce a free upfront model once we have the 2 year program running and have more data on quality of students and outcomes.

Garry Tan had an interesting take, he sees the free upfront model as less risky for the business because building a high quality brand is heavily dependent on producing top quality engineers. By charging up front tuition we wouldn’t attract the best talent and thus have a lower chance at having the best outcomes and truly challenging the Stanfords and MITs of the world. Yesterday I read a Wired article about how Warby Parker (a company I really respect) is able to sell cheap glasses and still give away a pair for every pair they sell. The founder put it quite simply:

“If it’s important to you as an organization, you find a way to make it work.” — Neil Blumenthal

We need to make a decision on this by the end of this week since marketing and curriculum development will significantly change if we go free upfront and accelerate the development of the 2 year program. I’d appreciate any thoughts, questions or concerns you have about this, even minor. Your feedback is essential to making the right decision.

Cheers,
Ashu and Jeremy

Make School

A collection on technology, startups, and the future of education.

Ashu Desai

Written by

Founder of Make School (www.makeschool.com) | YC Alum | Musician | Vegan

Make School

A collection on technology, startups, and the future of education.

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade