4 ms·

Happens when a business model is to sign up as many people as possible for the ISA (Income Sharing Agreement) and then immediately monetize that ISAs by selling

by Mikho 6y ago

Happens when a business model is to sign up as many people as possible for the ISA (Income Sharing Agreement) and then immediately monetize that ISAs by selling them with a discount to a 3rd party. That's basically Lambda business model. The main part is to sign up as many people as possible since in mean hard cash right away for every account that became locked in the debt. Education is just an irrelevant theme-trick to make people owe money. That's classic sting of when a mob seduces a target person to play in a rigged gamble game just to make the target owe this mob some money.

texasbigdata 6y ago
Anytime you securitize an asset like that credit quality gets heavily scrutinized. From a working capital perspective you can cause a real liquidity crunch if you’re simultaneously a) growing and b) deteriorating factored asset quality leading to lower advance rates on subsequent tranches in the SPV. Restated in English, if you’re taking payday loans and your income is declining you’re about to have a bad time.
TheRealDunkirk 6y ago
> ... then immediately monetize that ISAs by selling them with a discount to a 3rd party Is that really true? If so, this is shocking to me. If LS sells the ISA, then, obviously, they are no longer "aligned" with their students' success. What's the point of their "revolutionary" arrangement then? This makes perfect sense out of the jumble of anecdotes I'm reading. From further below: https://www.theverge.com/2020/2/12/21135134/lambda-school-students-edly-isa-debt-swapping-partnership-shares-investors https://www.theverge.com/2020/2/12/21135134/lambda-school-st.... In other words, yes, this is what's happening, and it's a disaster, for exactly the stated reason.
- blntechie 6y ago
  It is known that they package and sell the ISAs like other credit products. But regarding their alignment with student success, it’s to their benefit that these ISAs realizes i.e. students succeed as the ISA quality determine how much they can sell them for.
  - TheRealDunkirk 6y ago
    But that coupling is much looser, and lagging, than keeping those contracts in-house.
  - NationalPark 6y ago
    Assuming you are planning for long term success, of course. If you felt like the business wasn't going to work and you wanted to squeeze as much cashflow out of it as possible before the music stops, it would also look like this. I'd also expect ballooning teacher-student ratios and big weed-out bars that lock students into the ISAs but save money by kicking them out halfway. Edit: Another commenter pointed out that if you expect a good number of the ISAs to end up in litigation with students who feel mislead, it also makes sense to dump them at a discount on someone else, so your name doesn't show up immediately on the lawsuits.
bertjk 6y ago
Wait.. so they were securitizing their ISAs? I had no idea they were doing that. It is a brilliant twist I didn't expect, and that also causes me to lose all respect for them. I liked the ISA idea before, but this... is perverse.
- ryanSrich 6y ago
  What exactly is wrong with it? They’re still heavily incented to get their students hired. If all they’re selling is F tier contracts then eventually they’ll dry up. They clearly need to continue pumping out students capable of repaying those loans. This simply gives them a way to tap into the cash they would get in the future, just a few years earlier. And if there’s a 3rd party that wants to take on that risk I see no issue with it.
  - bertjk 6y ago
    It means that in the sort of zero interest rates environment that we are in, where investors are desperate for yield, they will probably be able to sell these for years longer than they otherwise would have (and ruining lives in the process) before the house of cards finally comes crashing down. In theory you are right, and in theory savvy investors would have never allowed the subprime mortgage market to get so ridiculous to allow the 2009 GFC to manifest. But I think in reality it changes the game greatly. Before securitization Lambda is incentivized to produce grads with lucrative job placements. Now they may find that they get a better return on their efforts going for volume and marketing their ISA bundles. Teaching 5K bootcampers to code is hard. They may find that roping in a Masa Son or other less savvy fund to overpay for a portfolio of 100k ISAs (growth produced by lowering standards and taking on unqualified candidates ) to be relatively easier.

by Mikho 6y ago

texasbigdata 6y ago

Anytime you securitize an asset like that credit quality gets heavily scrutinized. From a working capital perspective you can cause a real liquidity crunch if you’re simultaneously a) growing and b) deteriorating factored asset quality leading to lower advance rates on subsequent tranches in the SPV. Restated in English, if you’re taking payday loans and your income is declining you’re about to have a bad time.

TheRealDunkirk 6y ago

> ... then immediately monetize that ISAs by selling them with a discount to a 3rd party Is that really true? If so, this is shocking to me. If LS sells the ISA, then, obviously, they are no longer "aligned" with their students' success. What's the point of their "revolutionary" arrangement then? This makes perfect sense out of the jumble of anecdotes I'm reading. From further below: https://www.theverge.com/2020/2/12/21135134/lambda-school-students-edly-isa-debt-swapping-partnership-shares-investors https://www.theverge.com/2020/2/12/21135134/lambda-school-st.... In other words, yes, this is what's happening, and it's a disaster, for exactly the stated reason.

blntechie 6y ago
It is known that they package and sell the ISAs like other credit products. But regarding their alignment with student success, it’s to their benefit that these ISAs realizes i.e. students succeed as the ISA quality determine how much they can sell them for.
- TheRealDunkirk 6y ago
  But that coupling is much looser, and lagging, than keeping those contracts in-house.
- NationalPark 6y ago
  Assuming you are planning for long term success, of course. If you felt like the business wasn't going to work and you wanted to squeeze as much cashflow out of it as possible before the music stops, it would also look like this. I'd also expect ballooning teacher-student ratios and big weed-out bars that lock students into the ISAs but save money by kicking them out halfway. Edit: Another commenter pointed out that if you expect a good number of the ISAs to end up in litigation with students who feel mislead, it also makes sense to dump them at a discount on someone else, so your name doesn't show up immediately on the lawsuits.

bertjk 6y ago

Wait.. so they were securitizing their ISAs? I had no idea they were doing that. It is a brilliant twist I didn't expect, and that also causes me to lose all respect for them. I liked the ISA idea before, but this... is perverse.

ryanSrich 6y ago
What exactly is wrong with it? They’re still heavily incented to get their students hired. If all they’re selling is F tier contracts then eventually they’ll dry up. They clearly need to continue pumping out students capable of repaying those loans. This simply gives them a way to tap into the cash they would get in the future, just a few years earlier. And if there’s a 3rd party that wants to take on that risk I see no issue with it.
- bertjk 6y ago
  It means that in the sort of zero interest rates environment that we are in, where investors are desperate for yield, they will probably be able to sell these for years longer than they otherwise would have (and ruining lives in the process) before the house of cards finally comes crashing down. In theory you are right, and in theory savvy investors would have never allowed the subprime mortgage market to get so ridiculous to allow the 2009 GFC to manifest. But I think in reality it changes the game greatly. Before securitization Lambda is incentivized to produce grads with lucrative job placements. Now they may find that they get a better return on their efforts going for volume and marketing their ISA bundles. Teaching 5K bootcampers to code is hard. They may find that roping in a Masa Son or other less savvy fund to overpay for a portfolio of 100k ISAs (growth produced by lowering standards and taking on unqualified candidates ) to be relatively easier.