7 ms·

This is very interesting, and I'm curious about the nature of the risk that you're taking on. It seems like risk would only become a factor for Lambda School i

by vikp 8y ago

This is very interesting, and I'm curious about the nature of the risk that you're taking on. It seems like risk would only become a factor for Lambda School if you're taking 10% of pre-tax income from graduates for the 5 chronological years immediately after they graduate (regardless of employment status). If you're instead taking 10% of pre-tax income from graduates for the next 5 years in which they're working (non-chronological), then the risk on your side actually seems fairly low, since most software jobs in the US pay >50k a year. If you're taking 10% of pre-tax income from folks for the next 5 years in which they're employed AND making >50k, then the risk for Lambda School is basically zero. I believe this scenario is what is actually happening. If the final scenario I laid out is what is happening, then this seems very close to traditional debt (take a loan out for living expenses + tuition, then repay a much larger amount down the line).

austenallred 8y ago
> then the risk to Lambda School is practically zero If only! We only get paid if a student is making $50k/yr or more and the agreement is time-bound (10 yrs). A student may teach those levels of salary without our involvement, but when our possible downside is $18k + the cost of training and our potential upside is somewhere between $0 and $50k any level of default or non-hiring destroys returns immediately.
- vikp 8y ago
  If you're only getting repaid when someone is employed and making over 50k, which seems to be the case from your website ("Upon completion of the program, students will pay 10% of their [pre-tax] salary for a five year period once they're making at least $50,000 per year"), then the "repayment floor" for Lambda school is 25k (with probably a close-to-50k "repayment average"). I'm assuming that if someone loses a job, and later regains one, then payments pause while they're unemployed, but don't count for "repayment time", due to an article I read -- https://www.nytimes.com/2019/01/08/business/dealbook/education-student-loans-lambda-schools.html https://www.nytimes.com/2019/01/08/business/dealbook/educati.... How I think it works is that once someone graduates, they have 5 years of "repayment time debt". Once they get a job that pays >50k, the "repayment time debt" starts ticking down. If they lose their job, or start making <50k, then their "repayment time debt" stops ticking down, and will resume when they next get a job. Even with a 10-year cap, this seems very close to traditional debt. It seems likely that software engineers will make more than 50k for 5 out of 10 years.
  - austenallred 8y ago
    The repayment floor is $0. You’re assuming that everyone will quickly start making over $50k, which isn’t the case. Given that we outlay ~$30k in stipends and training and the cost of that capital is non trivial there’s no way a loan term would come close to this.
    - ryan_j_naughton 8y ago
      "Rates for PLUS loans, which are for graduate students and parents, rose to 7.60%" [1] 7.6% interest for 5 years on a $30k loan is $43,269.57. However that is: - a government loan where default rates don't directly drive the interest rates - effectively subsidized by the govt In your situation you must have much higher costs of capital from capital markets than the government's t-bill rates of 2.5% [2]. Especially given that your product is effectively equivalent to a unsecured loan in the eyes of wall street. Then compound that some percentage of students don't make the $50k income requirement in the first year or two after the program and others who are even further delayed. We can equate this to a traditional default rate except the are no negative consequences to your student for delaying (in comparison to traditional default which hurts their credit), all the while your cost of that original capital keeps growing. Given that your upper bound repayment is 50k and most students won't make more then $100k their first couple years out, then that is an effective interest rate of 11% if the 50k is paid over 5 years. All in, you guys have a tricky problem. That is unless you can get as good as Sofi at picking which people to finance, i.e. Those that will immediately many >100k and with a quicky increasing salary. But Sofi has it easier bc they just cherrypick all the Stanford MBA grads who already have high paying jobs and first refinance their Debt. You on the other hand have to forecast accurately who will be successful. Total capital cost isn't that much though. 1k students at $30k is $30M. You can easily raise VC to cover that (actually already raised $48m [3]) and don't need traditional capital markets / wall street to prove the idea. Only when you begin to have 20k+ students would you need traditional debt facilities. Thus, isn't your cost of capital just giving the VC ownership in the company instead of a repayment cost of capital (for now at least)? [1] https://www.nerdwallet.com/blog/loans/student-loans/student-loan-interest-rates/ https://www.nerdwallet.com/blog/loans/student-loans/student-... [2] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=billrates https://www.treasury.gov/resource-center/data-chart-center/i... [3] https://www.crunchbase.com/organization/lambda-school https://www.crunchbase.com/organization/lambda-school
- runT1ME 8y ago
  Love what you're doing. Think the model could work for other well paying jobs such as the medical field or legal?
  - austenallred 8y ago
    Watch this space.
  - bluedino 8y ago
    You would think medical jobs would have some kind of on-the-job training while they pay for your school

by vikp 8y ago

austenallred 8y ago

> then the risk to Lambda School is practically zero If only! We only get paid if a student is making $50k/yr or more and the agreement is time-bound (10 yrs). A student may teach those levels of salary without our involvement, but when our possible downside is $18k + the cost of training and our potential upside is somewhere between $0 and $50k any level of default or non-hiring destroys returns immediately.

vikp 8y ago
If you're only getting repaid when someone is employed and making over 50k, which seems to be the case from your website ("Upon completion of the program, students will pay 10% of their [pre-tax] salary for a five year period once they're making at least $50,000 per year"), then the "repayment floor" for Lambda school is 25k (with probably a close-to-50k "repayment average"). I'm assuming that if someone loses a job, and later regains one, then payments pause while they're unemployed, but don't count for "repayment time", due to an article I read -- https://www.nytimes.com/2019/01/08/business/dealbook/education-student-loans-lambda-schools.html https://www.nytimes.com/2019/01/08/business/dealbook/educati.... How I think it works is that once someone graduates, they have 5 years of "repayment time debt". Once they get a job that pays >50k, the "repayment time debt" starts ticking down. If they lose their job, or start making <50k, then their "repayment time debt" stops ticking down, and will resume when they next get a job. Even with a 10-year cap, this seems very close to traditional debt. It seems likely that software engineers will make more than 50k for 5 out of 10 years.
- austenallred 8y ago
  The repayment floor is $0. You’re assuming that everyone will quickly start making over $50k, which isn’t the case. Given that we outlay ~$30k in stipends and training and the cost of that capital is non trivial there’s no way a loan term would come close to this.
  - ryan_j_naughton 8y ago
    "Rates for PLUS loans, which are for graduate students and parents, rose to 7.60%" [1] 7.6% interest for 5 years on a $30k loan is $43,269.57. However that is: - a government loan where default rates don't directly drive the interest rates - effectively subsidized by the govt In your situation you must have much higher costs of capital from capital markets than the government's t-bill rates of 2.5% [2]. Especially given that your product is effectively equivalent to a unsecured loan in the eyes of wall street. Then compound that some percentage of students don't make the $50k income requirement in the first year or two after the program and others who are even further delayed. We can equate this to a traditional default rate except the are no negative consequences to your student for delaying (in comparison to traditional default which hurts their credit), all the while your cost of that original capital keeps growing. Given that your upper bound repayment is 50k and most students won't make more then $100k their first couple years out, then that is an effective interest rate of 11% if the 50k is paid over 5 years. All in, you guys have a tricky problem. That is unless you can get as good as Sofi at picking which people to finance, i.e. Those that will immediately many >100k and with a quicky increasing salary. But Sofi has it easier bc they just cherrypick all the Stanford MBA grads who already have high paying jobs and first refinance their Debt. You on the other hand have to forecast accurately who will be successful. Total capital cost isn't that much though. 1k students at $30k is $30M. You can easily raise VC to cover that (actually already raised $48m [3]) and don't need traditional capital markets / wall street to prove the idea. Only when you begin to have 20k+ students would you need traditional debt facilities. Thus, isn't your cost of capital just giving the VC ownership in the company instead of a repayment cost of capital (for now at least)? [1] https://www.nerdwallet.com/blog/loans/student-loans/student-loan-interest-rates/ https://www.nerdwallet.com/blog/loans/student-loans/student-... [2] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=billrates https://www.treasury.gov/resource-center/data-chart-center/i... [3] https://www.crunchbase.com/organization/lambda-school https://www.crunchbase.com/organization/lambda-school
runT1ME 8y ago
Love what you're doing. Think the model could work for other well paying jobs such as the medical field or legal?
- austenallred 8y ago
  Watch this space.
- bluedino 8y ago
  You would think medical jobs would have some kind of on-the-job training while they pay for your school