A famous coding bootcamp is rethinking its unusual business model

Lambda School's income sharing agreements just became a worse deal for students.
A famous coding bootcamp is rethinking its unusual business model
(Photo by StartupStockPhotos)

There's been a lot of Silicon Valley buzz about Lambda School, a startup that runs online coding bootcamps. After the startup was accepted into the prestigious accelerator Y Combinator in 2017, YC founder Paul Graham and other tech luminaries started touting it as an alternative to a conventional college education.

One of Lambda School’s signature innovations was the use of income sharing agreements. Instead of paying tuition up front, students agreed to pay Lambda School 17 percent of their earnings for two years after graduation, up to a maximum of $30,000. Crucially, they’d only have to pay if they landed a job that paid $50,000 or more. This gave Lambda School an incentive to teach practical skills and help students get lucrative tech jobs.

But recently Lambda School has struggled. It laid off workers in April 2020 and again in April 2021. It has gotten bad press and faced lawsuits from students claiming Lambda School exaggerated its job-placement rates.

On Tuesday, Lambda School announced it was changing its name to Bloom Institute of Technology. The official explanation was vague, but it may have been the result of a trademark dispute with the similarly-named Lambda Labs.

What caught my eye, however, was another announcement that Lambda, sorry BloomTech, made the same day: that it’s taking a step away from traditional income sharing agreements.

Under the old rules, most students didn’t pay a dime until after they graduated (a few chose to pay around $20,000 in conventional tuition instead). Now students who choose the ISA model will have to make a down payment of $2,950. In exchange, BloomTech is lowering the repayment percentage from 17 to 14 percent. But it’s also extending the repayment period from two years to four and raising the maximum repayment amount from $30,000 to $40,000. And that's on top of the $2,950 downpayment.

Alternatively, students can pay $7,950 up front, in exchange for a shorter repayment period (3 years) and a lower repayment cap ($30,000). But both of these options are significantly worse than the ISA terms Lambda School offered in the past.

The adverse selection problem

If you’re a long-time reader of this newsletter, this shift won’t surprise you. Back in September, Alan wrote about the fundamental challenge facing any income-sharing agreement. Economists call it adverse selection.

Students often know more about their likely earning prospects than schools do. If a student is confident in her post-graduation earning potential, she can use that to her advantage by choosing a conventional loan, which will cost high-earning students less than an ISA.

The likely result will be a pool of ISA participants with below-average earnings. That will force schools to claim a larger share of those earnings to break even. And this could cause a downward spiral: the worse the ISA terms get, the more high-earning students will opt out, and the harder it will be for the ISA program to cover its costs.

Requiring a downpayment is a way for BloomTech to limit the adverse selection problem. The up-front payment will scare away some students who are less confident in their earning potential or less committed to seeing the program through to the end.

Yet evidently this change on its own wasn’t enough to salvage the economics of the ISA: BloomTech also found it necessary to lengthen the repayment period and increase the repayment cap.

BloomTech’s money-back guarantee may not mean much

In his September piece, Alan observed that conventional loans and ISAs have gotten more similar over time. The federal government now offers income-based repayment options that work a bit like an ISA: graduates with high earnings pay more each month than those with lower earnings.

Now BloomTech is aiding this convergence from the other end. Instead of letting students finance 100 percent of their costs with an ISA, BloomTech is now asking students to make what amounts to a conventional tuition payment to cover a portion of the cost.

BloomTech also announced another new financing option this week: a loan that’s forgivable if the student fails to find a job. On its home page, BloomTech claims that under this program, “if you don't get a job, you won't pay BloomTech a penny.”

This sounds like another example of the convergence of loans and ISAs. But the devil is in the details, and the details here are not very favorable to students.

To qualify for a tuition refund, a student must actively search for a job for a year after graduating. And “actively” really means actively: a graduate must “apply for 10 jobs, reach out to 10 individuals for professional networking, and post at least 5 GitHub contributions to your public GitHub profile.” A graduate must do all three of these things every week for at least 46 out of 52 weeks after graduation.

Given these strict rules, it’s hard to imagine many people actually qualifying for a refund. Most people can’t afford to go a year without working, especially after they’ve just spent 6 months or longer at a coding bootcamp. So if someone can’t find a programming job after a few months of searching, they’ll likely need to take a job doing something else. And it may not be practical—or fair to their new employer—to continue an intensive search for a different job. They may have little choice but to give up searching for a coding job and forfeit their tuition refund.

So while it might sound like BloomTech is offering a loan that works a bit like an income sharing agreement, I suspect it’ll just work like a normal loan for most students. BloomTech graduates who get high-paying programming jobs will have to pay back their loans. And a lot of BloomTech graduates who don’t get high-paying programming jobs may have to pay back their loans anyway.

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