THE STUDENT DEBT BUBBLE
Good morning, Term Sheet readers.
America’s student loan debt problem is nearing a full-blown crisis.
Outstanding student debt hit $1.5 trillion for the first time ever in 2018, and it doesn’t seem to be getting better. In fact, it appears that the trend is only accelerating when you consider that student debt accounted for $600 billion 10 years ago.
In a 2017 commentary piece for Fortune, veteran investor Jim Rogers and former academic dean Robert Craig Baum said the higher education bubble, which is one-sixth (!) of the U.S. economy, “will likely burst with the force of all previous catastrophes combined.”
As people who love running toward large, terrifying, and thorny problems, venture capitalists are eyeing a new model. This morning, I read a New York Times piece by Andrew Ross Sorkin on a company experimenting with an intriguing new education model.
You may have seen online learning startup Lambda School popping up in the Term Sheet venture section below over the course of the last year, and it’s gaining more steam. Today, it raised $30 million in funding from investors Geoff Lewis (founder of Bedrock), GV, GGV Capital, Vy Capital, Y Combinator, and Ashton Kutcher. The new round values the startup at $150 million.
Lambda uses income share agreements — rather than charging students tuition, students attend school for free and are required to pay back a percentage of their income after graduation, but only if they get a job with a good salary.
From Sorkin’s article on how the model works:
At Lambda, students pay nothing upfront. But they are required to pay 17 percent of their salary to Lambda for two years if they get a job that pays more than $50,000. (Lambda says 83 percent of its students get a job with a median salary of $70,000 within six months of graduating.) If they don’t get a job, or their salary is lower, they pay nothing. Payments are capped at $30,000, so a highly paid student isn’t penalized for success, and if a student loses a job, the payments pause.
For now, Lambda has focused heavily on subjects like coding and data science, but it will use the new funding to expand into other subjects that could lead it to become a full-blown university in its own right.
Income share agreements have long been criticized for being modern-day forms of indentured servitude and even described as predatory and discriminatory if taken to the extreme. (Some will argue that Lambda’s 17% of the salary for two years is high.) And of course, there are more high-level questions such as — if we do hit a recession in the near future, how will that affect Lambda’s demand? Will students agree to commit full-time for 30 weeks to the school when money becomes tight?
Needless to say, I’m watching this one closely and thinking more about the looming student debt crisis that has the potential to do irreparable damage if left unaddressed.
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