Is the Pay-As-You-Earn Model the Future of Education?
What is the Pay-As-You-Earn model?
Pay-As-You-Earn model is a system that bases student loan repayments on the future salaries of students. An example of this would be a student who signs an agreement to pay 10% of his salary for a fixed number of years after which the agreement expires. This model is followed by Lambda School. In the current education system this is important because it is estimated that in the US alone about 70% of students take on student debt. The average debt that a young student takes on is US$30,000 per year. This means that there are 18 year olds who are betting US$120,000 on a major they enjoy, without knowing for sure if the education they are getting would lead to a high paying job. But how much is your degree actually worth compared to other degrees? And why should universities who are supposed to be invested in your future, not have any skin in the game?
What is Lambda School?
With investors like GV (Google Ventures) and Ashton Kutcher, Lambda School is a combination of a school and an investment fund. According to the CEO Austen Allerd, the company aims to invest in the most unoptimised asset class in the market today- human capital. The company does this by finding untapped talent and providing training to this talent for the most in-demand jobs. The business model of the company is based on an income sharing agreement (ISA). The students do not have to pay any up-front costs. They undergo a 9 month full-time/18 month part-time online coding bootcamp. The students then pay 17% of their salaries for 2 years if they get a job that pays them more than US$50,000 a year, capped at US$30,000 regardless of how high their salaries are. If they do not get a high paying job for the next 5 years after completing the course, their ISA expires and they do not have to pay anything. So essentially the students sell shares in their talents by receiving assistance for school. The company is so confident about the educational value of its program that it is willing to bet its monetisation solely on the student’s success.
What the company does well?
The biggest reason that Lambda School is able to set itself apart from universities and traditional MOOCs is because of its focus on helping students get employed. In the past, people who were earning $18 an hour have up-skilled to a six-figure salary just on the basis of Lambda School’s curriculum. The company invests in students to develop all skills- soft as well as hard skills that are necessary for securing a job. In the intensive 9 month bootcamp, students are already introduced to skills like building a network starting from Week 3. The course is also built along the lines of helping students build a portfolio as they go through the course materials. At the end of the 9 months, they are already in a position of having a strong portfolio ready to send out to employers. Apart from simply teaching students on how to find jobs themselves, the company also envisions to act as a talent agency and has already partnered with 75 companies including IBM and PayPal, who they constantly supply talent with.
Lambda School has also gained a strong following because of the community it has developed. This community is so well-connected that in the Silicon Valley Lambda students are often called a cult. While this may have a negative connotation attached to it, I believe that the value of this community is priceless. Because of this cult like mentality, Lambda students receive a lot of support from each other such as finding job opportunities. In a world where network plays an important role in securing jobs, this community is what will ensure that the company stays ahead of its competitors.
Finally, the data that the company is collecting is key in ensuring that competitors are not able to execute their business model at a similar scale. Like any other university, the company has an admission process involving an interview and a rigorous pre-course work. Because of the first mover advantage, the company has been able to use the admissions process to build up predictive models. Today itself, these models are so strong that they can determine which students would be more likely to secure jobs, before they even take one lesson of the course. With an increasing number of students joining Lambda School, this model will only become more precise. Amidst the student loan crisis in the US and selected countries globally, this data could also be valuable in helping to underwrite future student risk.
What is the opportunity in Asia?
Malaysia is dealing with a big problem of student debt and unemployment. In 2019 the total amount of student debt in the country was US$9.5 billion. Moreover, in 2015 28% of bachelor degree holders were unemployed while 50% of working adults earned far below the living wage. This led to 51% of borrowers of student loans to default on their debt. In such a country, Lambda School could prove to be essential to train students for skills that are most in-demand. Additionally, with more and more tech jobs in the Silicon Valley and around the US becoming remote, Lambda School’s network would allow people from this country to have access to jobs that would let them earn at par with the company’s requirements.
Indonesia is another country where Lambda School should expand into. In Indonesia, there is a growing young working population and the market is shifting from a labour market to skilled workers. This is resulting in higher enrolments for university education. However, the total tuition for universities is 1.4x the GDP per capita with a shortage of student loan products given by banks. At the same time, in Indonesia most young people are tech-savvy and have an online presence. This would allow them to easily access Lambda School’s course materials. Additionally, Indonesia is also quickly establishing its dominance as a tech hub. With 5 home-grown unicorn companies, more and more global tech companies are also expanding into the country. This would allow Lambda School to have a viable market of employment opportunities for its students upon graduation.
In Asia as a whole, the company should expand into emerging markets like Thailand, Vietnam and India. Although the company may face challenges due to local languages, these countries have a huge untapped working population. Moreover in these markets, young people have seen the impact technology very quickly had on their country and their own economic conditions. As a result, a large portion of this untapped working population is hardworking, positive about their future economic conditions and keen to ride the technology wave. Through investing in these people and bridging the quality of job opportunities, the sheer impact that Lambda School can have in these regions is undeniable.
