What every employer wants are candidates with particular skills – technical and interpersonal – and the determination to see their company to success. These are the sorts of people employers want to invest in. Now, you can too.
With all the world’s information only as far away as a Google search, the ability to connect the dots through specific skill sets are what employers are willing to pay for. College graduates can expect to earn $1 million more in lifetime income than those with a high school diploma. And in many fields, especially vocational fields, a college education is not required to perform a particular job, but skills training is. This preparation isn’t cheap, and federal student loans don’t cover the entire cost of a higher education and skills training
About Income Share Agreements (ISAs)
Income Share Agreements (ISAs) are a fast-growing alternative to private student loans, and represent a creative way for investors to generate income while providing students a better alternative than traditional student loans. We’ve talked before about the idea of a human IPO where someone might sell their future earning potential for money now. An ISA works in a similar fashion.
Investors put up money upfront for student tuition. To pay back investors, students pay a fixed percentage of their earnings – only when and IF they earn over a certain minimum income threshold. After a grace period which gives the student time to find gainful employment, ISA repayment happens over fixed payment terms that are designed to be affordable. Unlike a traditional loan, there is never accrued interest. The total amount of payments over the ISA term are subject to a payment cap which is usually around 1.5 times the amount of tuition.
Let’s say Gwyneth decides to pursue a coding bootcamp so she doesn’t have to spend the rest of her life working in a dead-end job. In this case, accredited investors will offer a commitment to pay the tuition up front. In exchange, a student will (as an example) pay 10% of their earnings each month for 48 months, but only if they earn over $45,000 per year. Payments are also subject to a total cap on payments– for example, the student will never pay more than 1.5 times the tuition. There is also a payment obligation window after which the student no longer has any obligation to make further payments, regardless of the number or amount of payments made.
In order to better understand how ISAs work, we sat down to talk with CEO and Co-Founder of Edly, Christopher Ricciardi, a man who has spent the last 30 years providing funding to a wide variety of companies and individuals.
“In an ISA, the students make payments which are affordable because they are a small percentage of the amount they earn.”
Christopher Ricciardi, CEO and Co-Founder of Edly
Founded in 2019, New Yawk startup Edly has taken in $3.5 million in funding to build an online marketplace connecting schools and accredited investors to fund ISAs. They claim to be the “only complete ISA funding solution,” and they prefer to work with schools that are committed to providing students with strong employment opportunities. Since the investor’s return is based on the student receiving a well-paying job, employability becomes a key performance indicator for ISAs. Edly believes that ISAs, in many circumstances, are the more affordable and flexible option when compared to traditional student loans, and they provide schools and students with analytical tools to compare private loans with ISAs.
Edly also likes to make the schools have some skin in the game. For example, the school may receive 75% of their tuition payment upfront with the remainder tied to the income sharing agreement which provides the school with additional upside. So far, more than 2,100 students have taken loans using the platform. Edly targets returns of 12-16%, something that is best understood by using the aforementioned example of Gwyneth.
Gwyneth takes out a $10,000 ISA for tuition in her last year of study at a coding bootcamp with a 1.4 cap on the payback. At the end of that year, she gets a job that pays $70,000 a year. Here’s the payback schedule:
- By the end of year two, $7,000 is paid back.
- By the end of year three, $14,000 is paid back
As you can see, duration of the repayment term will vary based on when the student gets a job and how much the job pays. In this case, the investor would have made a 12% annual return on their money over three years with monthly cash flows in years two and three.
Here’s an example offering where they’re targeting a yield of 16.23% with a coding school that has an 82% placement rate after three months for graduating students.
Code Schools and ISAs
According to code.org, more than 550,000 open computing positions exist in the U.S., though American colleges graduated just 60,000 computer science majors into the workforce in 2018. At this rate, it would take American colleges eight years to meet current demand for computer engineering skills.
Given this strong demand, we’re now seeing the emergence of “code bootcamps” or code schools where students receive hands-on experience learning how to code. It’s something we discussed in our previous article on What is the Best Way to Learn Artificial Intelligence? Code schools differ from colleges or universities in that they only focus on the skills you’ll need to perform a code-related job. Code schools will then help place graduating students with employers who desperately need these skills. For the student, the increase in earnings potential is dramatic.
Code schools are expected to enroll 36,000 students in 2019, up 49% from 2018. Since most of these schools are not federally accredited, students are ineligible for federal loans or financial aid. As a result, coding academies have been early adopters of ISAs which students often prefer to private student loans. The best code schools will have already-established relationships with technology companies who can then recruit students as they graduate. These success metrics are what Edly looks for when they establish a relationship with a school like Sollers College.
ISAs work great for any sector where you have technical schools that train students for a particular career where skills are in demand. For example, nursing is a profession that has always been in demand and continues to be in demand, no matter how many surgical robots we create. Edly’s focus on engineering, healthcare, coding, and certain industrial professions, ensures that students graduate quickly and get to work quickly to get those loans paid and increase the annual return for investors.
The Benefits of ISAs
Let’s review the benefits of ISAs from the perspective of each stakeholder involved:
- Students – Based on Edly’s analysis, those who pay the maximum capped amount would often pay about the same as they would under a private student loan, but they benefit from the flexibility of an ISA.
- Schools – Additional upside from tuition agreements, more students to attend as a result of additional financing options.
- Investors – High expected yield, monthly cash flows, diversification, short maturity, and possible tax advantages.
In essence, Edly is conducting a form of arbitrage on the broken student loan industry where there is roughly $119 billion in student loan debt outstanding. In exchange, they’ll charge a fee to schools that want to setup an ISA and a 2-4% management fee which helps pay for the platform they’ve built. Mr. Ricciardi talked about how Edly differentiates their offering from other companies out there working with ISAs. Most of these companies are focused on servicing ISAs as opposed to structuring them as investment products.
In looking at the leadership team at Edly, it’s clear that some very high-caliber individuals in finance are behind the platform. In order to scale such a business to unicorn size, you need involvement from institutional investors. Edly is seeing relatively heavy demand from institutional investors because they’re experts in building financial products. They know what institutional clients look for in an investment and how to bundle financial products and sell them. In an industry where connections mean a lot, they’re able to leverage prior business relationships to succeed where others might fail.
Do Good by Doing Good
There is clearly a feel-good element here which surrounds this notion of helping students fund their college tuition so more kids can have access to a better education and help improve our planet. That’s great, and we applaud the idea. However, as investors, we’re interested in stress testing this asset class a bit. We’re cynics, and some of our initial concerns were:
- Funding any educational track – say, as opposed to an education that you can make a decent living with.
- A student does not have to pay back their loan if they can just avoid a job for so many months.
- The correlation of ISAs to the broader stock market.
Let’s start with the first bullet point.
Edly has a platform that lets investors connect with institutions of higher learning with students that need financing. If an impact investor wants to fund anyone who wants to major in say, Social Work, they can. Or, if they want to provide funding for specific student demographics, they can do that as well. Edly is easily able to fill these mandates, but that doesn’t mean you have to invest in them too.
In regards to a student avoiding payback, it seems highly unlikely. As part of the process, the student gives Edly access to their tax returns for a duration of 7 to 10 years. It is in the student’s best interest to get a high-paying job. Once they’re gainfully employed, the student then begins paying back the obligation.
As for correlations of ISAs to the broader stock market, we would assume that available jobs will decrease when the economy goes into a recession. (What’s going on in the world today is a great example of a “shock” for asset classes that depend on people being employed.) This is where the type of job can help reduce correlation. Sure, tech jobs may follow the fate of tech stocks, but jobs like nursing will remain in demand even during a recession.
We can argue about who is responsible for the student debt crisis or we can take steps to improve the situation going forward. Allowing a student access to future income and asking for repayment based on their monthly income is a way to ensure investors see greater upside than just loaning out money at a fixed interest rate. Schools benefit and students benefit. With income share agreements, everyone wins.
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