From state universities to coding bootcamps, an increasing number of education providers now offer income share agreements, more commonly known as ISAs. These arrangements allow students to put off paying for their education until after they land a job. That also means schools don’t receive any money until years down the line.
To get capital, some schools have taken to selling ISAs to private investors. Enter edly, which provides an online marketplace to facilitate these transactions. What the New York-based company offers is essentially a way for schools to sell the rights to future ISA repayments to accredited investors in return for money upfront. (Some bootcamp companies, including Lambda School, already do this.)
Today, edly announced it has raised a seed round from Mistral Venture Partners. Financial terms of the deal were not disclosed; Code Cubitt and Pablo Srugo, respectively managing partner and principal of Mistral, will join edly’s board of directors.
On edly, participating schools share how much they are looking to raise, along with other details about their programs—including historical graduation rates, how long it takes for graduates to land a job and the salaries they make. Other financial details, including repayment terms, are worked out between the school and the edly team. “Investors typically don’t want to negotiate individual deals with individual schools,” says Charles Trafton, co-founder and president of edly. “They want a place where they can point and click to invest in these programs.”
Interested investors can then buy shares of an ISA pool offered by the school, and their returns are proportional to the percentage they put in. (For example, let’s say a school is offering $2 million worth of ISAs. If an investor puts in $500,000, the funder is entitled to 25 percent of the future repayment from the students supported in that pool.) The company takes a small cut of each investment, and also charges schools a fee to list their ISAs on the platform.
So far, six schools including Bottega, Holberton School and V School have listed ISAs on the edly platform, according to Trafton. Holberton was the first, netting $2 million from six investors. And there’s growing demand to broker more transactions, he adds, saying that his team is currently signing on a couple of new schools each month. Advanced Welding School, American Diesel Training Centers and Sabio, a coding school, are also expected to list on the platform.
“Schools love it when investors can come in and participate in funding their programs,” he says. It can be expensive for them to keep their programs running while offering ISAs if they are not getting any tuition, Trafton notes. That’s why startups like Lambda School and Thinkful have raised tens of millions of venture capital dollars to support their operations.
Income share agreements stipulate that graduates pay back a percentage of their incomes for some time after landing a job. For private providers like coding bootcamps, repayment terms typically last for 2 to 4 years, during which graduates pay 15 to 20 percent of their monthly paychecks. (For public universities, the percentages are generally lower but the repayment windows are longer.) There is also usually a minimum salary that graduates must earn before they repay their ISAs, and a cap on the total amount they pay back.
Popular among nontraditional education providers, ISAs are also offered at a few large public institutions including Purdue University and the University of Utah. The California legislature is currently considering a bill to allow its state university systems to pilot ISAs starting in 2021.
Income share agreements have also made their way to Capitol Hill, as lawmakers have proposed ways to both support and regulate their use. A bipartisan bill is under consideration in the Senate, and a U.S. Department of Education official has expressed interest in launching a federal experiment to offer ISAs.
Critics say ISAs are yet another instrument of student debt, prone to deceptive marketing and predatory lending terms. Some point out that students may actually end up paying more through an ISA than if they had paid upfront.
Financiers and federal regulators don’t often see eye to eye. But Trafton says he is in favor of instituting federal regulations on ISAs, so that “investors, schools and students all know the rules of the road.”
According to his logic, regulation could also make ISAs more mainstream, which works in favor of his long-term vision for their potential as attractive financial assets. He hopes that as ISAs catch on, in a couple of years “we’ll be able to package them up in larger sizes, much like mortgages and student-loan debt, which can be traded as securitized assets.”
Any new financial assets that can be swapped and traded will face regulatory scrutiny, and the team behind edly should be well aware of the risks. Its CEO is Christopher Ricciardi, who The Wall Street Journal once dubbed the “grandfather” of collateralized debt obligations, a financial instrument that was involved in the 2008 mortgage crisis.