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[Report]

Skin in the Game

Wall Street’s answer to the student-debt crisis

Illustrations by Paul Blow

[Report]

Skin in the Game

Wall Street’s answer to the student-debt crisis
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Dusan Simien was born and raised in San Francisco, but he had begun to feel like a stranger in his hometown. In the Nineties, when Simien was growing up, the Ingleside neighborhood where he lived was diverse—nearly half of its households were, like Simien’s, middle-class and African-American. But in recent years, friends and neighbors had left for more affordable towns and suburbs—so many that Simien had lost track. Over the course of his lifetime, the African-American population in San Francisco had been cut in half. “You can’t throw a rock and hit someone who actually grew up around here,” Simien liked to say.

As a teenager, Simien knew he wanted to work in the tech industry. While other kids in his neighborhood were playing outside, he was shooting aliens on his Xbox; when anyone in his family needed help with a broken printer or new cell phone, they called Simien. In 2017, at age twenty-five, he joined the International Brotherhood of Electrical Workers union, and he was soon making $30 to $40 an hour as an AV installer—as much as $75,000 a year if he could get steady work. Over the long term, though, the pay wasn’t going to cut it in the Bay Area. “Low six figures was beginning to feel like low-income,” he told me.

Simien and his family were just the sort of people getting priced out. He lived with his grandparents near the top of a sloping block in a boxy, two-story, suburban-style tract house—the kind of building that developers erected after World War II to accommodate the upwardly mobile families filling out the city’s edges. Simien’s grandmother worked for decades as a manager at a department store; by the mid-Nineties, she had saved enough money to buy the house for $150,000. The family is still paying off the mortgage. “I didn’t want to ever have to leave that house,” Simien told me. “I knew I had to do something.”

One day in 2017, Simien was riding the BART train when he saw an ad for the Holberton School, a for-profit technology training program. Holberton had plastered the stations with posters that said things like ivy league salaries and no up-front tuition and become a software engineer in 2 years or less. The ads featured flattering photos of people who looked like Simien’s friends from Ingleside: twentysomething African Americans, Asian Americans, and Latinos. They were all grinning.

Within days, Simien had submitted Holberton’s online application for a two-year course in software engineering, which required that he complete some basic computer-literacy exercises and write an essay about his interest in the school. The last step was signing an income-share agreement (ISA), which is how Holberton was able to accept students for its $85,000 program without requiring any payment up front. The ISA entitled the school to a stake in Simien’s future earnings. Once he graduated and started making more than $40,000 a year, he would owe the school 17 percent of each paycheck until he paid back the tuition or until he hit the cap of forty-two months.

To Simien, it seemed straightforward: “I printed it out and read it,” he told me. “On the top, it says, ‘This is not a loan.’ ” But though he didn’t realize it at the time, Simien’s signature had transformed him into a financial product. Unlike a traditional loan, the ISA was directly tied to Simien’s performance in the labor market—the more money he made, the more money he owed. That stream of income could then be packaged, bundled, and sold to investors, launching Simien into the Rube Goldberg machine of American finance.

Over the past several decades, higher education has become increasingly out of reach for those who would benefit from it most. Public financing that once allowed poor Americans to go to college has dried up, as has funding for job training and other “workforce development” programs, leaving shortages in skilled professions from nursing to welding. In the Sixties, the average low-income student attending college had 80 percent of their costs covered by Pell Grants; today the same figure is less than a third. The student-debt load has ballooned to $1.6 trillion, more than triple what it was just fifteen years ago. Fueled by a complex set of forces—predatory private schools and loan providers, poorly designed government subsidies, and the retreat of public funds—the student-debt burden has exacerbated existing inequalities. African-American students like Simien owe on average nearly 50 percent more in loans than their white peers.

The left wing of the Democratic Party wants to fix these problems by massively expanding public funding for education and training. Progressive Democrats are pushing to guarantee free college and vocational training, and they have proposed canceling existing student debt. Others, meanwhile, have been drawn to the ISA as a free-market tool that could expand access to higher education. Last year, Beth Akers, a senior fellow at the conservative Manhattan Institute, wrote an essay on ISAs titled “Let’s Solve the College Debt Crisis by Treating Students Like Startups.” The idea has caught the attention of the secretary of education, Betsy DeVos; her department recently considered plans to promote a number of ISA pilot projects at accredited universities.

Students at more than two hundred universities, from New York University to Southern New Hampshire University, have now financed their higher education through ISAs. The private-equity billionaire Robert Smith, who previously pledged to pay the student debt of graduates at Morehouse College, recently allocated $50 million to an ISA initiative for historically black colleges and universities. In 2016, Purdue University became the first four-year college to offer an ISA as a method of paying tuition. Purdue’s president, former Republican governor of Indiana Mitch Daniels, has been evangelizing ISAs to other schools across the country. “The best test of an innovation,” he wrote in a Washington Post op-ed, “is its acceptance and performance in the marketplace.”

If that is the case, the short record of ISAs is already worrisome. While traditional colleges and universities have been slow to adopt ISAs, their invention has led to an explosion of third-rate for-profit training programs for which traditional student loans are not available: marketing courses, pilot academies, software sales seminars, and tech boot camps like Holberton—fast-paced, lightly regulated schools that promise to launch students into careers in Silicon Valley. These programs often assure enrollees that, thanks to the structure of the ISA, they will be on the hook for the cost of their tuition only if they succeed in their chosen field. In many ways, that makes ISAs the perfect financial product for shoddy institutions. “We only get paid if you get paid” is a strong sales pitch if you’re trying to convince debt-averse students not to ask questions and just sign on the dotted line. The problem, as Simien found out, is that the pitch isn’t always honest.

On his first day at Holberton, Simien took the train from his grandparents’ house to the edge of the Tenderloin, the neighborhood that was once home to San Francisco’s premier jazz club, where Miles Davis recorded several live albums. Over the past decade, a generous municipal tax credit has transformed the formerly working-class area into a haven for tech firms of the kind that Simien hoped to work for. His new school was less than a mile from the headquarters of Twitter and Uber. Holberton impressed Simien—the open-concept office looked like Ikea had furnished an Apple store; there were brightly colored chairs, glass walls, and communal wooden tables. “This was the kind of space I wanted to be working in,” he told me. “I walked in juiced.”

Holberton advertised a project-based peer-teaching model: no instructors, just coding tasks it said were designed to help students get jobs. Students sat at the long tables in front of monitors, or in small conference rooms, while staff members spent their time tucked away in another room behind a glass door. This model allowed Holberton to do things on the cheap. It often relied on recent Holberton graduates to design its curriculum. For example, its machine-learning module, announced with much fanfare in December 2019, was designed by a twenty-five-year-old whose only coding experience outside of her time at Holberton was a free online course about deep learning.

From the outset, Simien struggled. He can be shy, and he felt bad asking other students to spend time helping him. “Programming was very foreign to me,” Simien recalled. “I had questions about everything.” While other students came into the program with a few computer-science classes under their belt, Simien had no basic knowledge of coding—something the school promised wouldn’t be a problem. “Holberton requires no prior coding experience. In fact, many of our best students came from backgrounds with no technical experience,” the school’s community manager, Charles Bathel, wrote in a blog post.

But peer teaching didn’t work for Simien. “How can someone who learned it yesterday teach me today?” he wondered. Simien watched as students who already had backgrounds in tech, or who were aggressive about getting more advanced students to help them, powered through the coding projects without any professional instruction. It was an intense and demanding atmosphere, and some students worked through the night, napping in conference rooms. One day, Simien spent eleven hours alone in a conference room working on an assignment. He gave up only after a classmate encouraged him to head home.

In his spare time, Simien was still doing commercial AV work—running cables, installing monitors, and hooking up sound systems in offices throughout the Bay Area. The family relied on his income. Since 2014, Simien’s grandmother had suffered from debilitating dementia—to the point where she no longer recognized Simien—and required round-the-clock care. Over the previous year, Simien told me, his grandfather had been slowing down, too. “I try to keep my activities local,” he said. “If they need something, I want to be able to rush home.”

Six months after starting at Holberton, Simien was summoned to a meeting with an administrator in one of the school’s glass-walled conference rooms. She accused him of having plagiarized an assignment, a blog post that was supposed to “explain the premise of algorithms” to a technologically illiterate friend or family member. Simien was almost too insulted to speak. He tried to explain that he had only modeled it on an example the school had provided, and that he had cited all his sources. Simien told the administrator he needed a moment to collect himself and went outside for a cigarette. When he tried to go back into the building, his key card had already been disabled.

“What happened to Dusan was messed up,” Essence Boayue, a Holberton student a year behind Simien, told me. Boayue was one of many Holberton attendees who described the school’s treatment of Simien as bizarre and unfair; other students had been caught breaking rules, they said, only to be gently chastised. Still, this was Simien’s second offense; he’d also been accused of copying a line of a classmate’s code. That, too, he claims was a misunderstanding: without instructors, students were often unsure of the boundary between collaboration and plagiarism. Nevertheless, Simien was expelled from the program. (Holberton’s co-founder Sylvain Kalache declined to discuss Simien’s case, but said that anyone suspected of plagiarism is entitled to one warning before expulsion.) Simien was nowhere near ready to apply for a job in the tech industry, but he was locked into his ISA.

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From one angle, ISAs are just a new form of private debt. Students promise to relinquish some amount of their future wages—a limited term of indentured servitude. But ISAs grew out of a particular free-market ideology, and their proponents often return to two refrains: the importance of “aligning incentives,” and of ensuring both parties have “skin in the game.” The theory is that educational institutions don’t have enough of a stake in the success of their graduates. Once alumni enter the labor market, schools are off the hook. But if universities, training academies, and coding boot camps got paid only after students secured a job, the market would compel them to better prepare students for the workforce.

The idea underpinning ISAs comes from the writings of Milton Friedman. In the Fifties, Friedman became concerned about what he called “government schools.” At the time, the GI Bill was making education at public universities increasingly accessible, and Friedman thought the system posed a threat to individual freedom. If the government was both paying for and administering schools, Friedman reasoned, it would likely discourage the teaching of viewpoints that challenged the state.

In 1955, Friedman penned an essay titled “The Role of Government in Education,” describing a number of alternatives to public education, including the rudimentary outlines of what would become the school voucher program. He also proposed a scheme in which investors could “ ‘buy’ a share in an individual’s earning prospects.” Friedman did not explain how such a marketplace would be built. But its logic, he argued, was unassailable. “A lender would get back more than his initial investment from relatively successful individuals,” Friedman wrote, “which would compensate for the failure to recoup his original investment from the unsuccessful.” Such a program would not only get the government out of the business of running schools—it would also extend opportunities to promising students from poor communities.

Nearly twenty years passed before anyone tried out Friedman’s idea. In the early Seventies, Yale University introduced an ISA for its undergraduates. Instead of paying tuition up front, 3,300 students—including Bill Clinton—opted to pay the school back after graduation at a rate of 0.04 percent of their post-graduation salaries for every $1,000 borrowed. Yale would continue to take payments until the entire cohort paid back their loans; the obligation would sunset after thirty-five years. The program was the brainchild of the economist James Tobin, who went on to win the Nobel Prize for his contributions to portfolio-selection theory, a field that aimed to explain, among other things, why individuals and households choose to incur debts. The initiative was billed as a way for students planning lucrative careers to subsidize the tuition of their peers.

But the program had a loophole: students could exit the pool by paying back 150 percent of the amount they owed as a lump sum. Twenty-seven percent of Clinton’s cohort took that option, including the future president, who had borrowed only $500 to begin with. That meant they were no longer responsible for their peers, which caused a problem when a large portion of the students defaulted, leaving the remaining students—many of them low-income—to fork over a percentage of their earnings to the university seemingly in perpetuity, some paying significantly more than the amount they borrowed but unable to muster the 150 percent needed to opt out entirely.

By the late Nineties, not a single cohort had paid back its debt in full. In 2001, facing significant criticism from alumni who’d been paying for decades, Yale president Richard Levin ended the program, calling it an “experiment that had good intentions but several design flaws.” As one Yale ISA participant, Frank Patton, remarked to the Yale Daily News: “Yale wanted to have more public-school kids and people from lower economic classes, but didn’t want to pay for it.”

Today’s ISA evangelists claim to have learned from this early experiment. Charles Trafton, the founder of FlowPoint Capital, has become perhaps the most important proponent of ISAs on Wall Street. Trafton built a reputation on his flair for short selling, picking stocks that were set to crash. He thought students were a particularly bad investment. In early 2017, the New York Times wrote that Trafton was “investing in the pain of student debt,” making fivefold returns by shorting college-loan and student-housing providers. He appeared on the front page of the Business section, posing in a trim suit on the grounds of his alma mater, Boston College, looking roguishly into the distance.

Trafton’s strategy changed when he heard about ISAs in 2016 at a financial conference in Texas. He describes the experience like a financier’s version of a religious epiphany. He just couldn’t stop thinking about the perfect logic of the system. “As soon as I figured it out, I dropped everything to do it full time,” he told me. By 2017, he’d directed FlowPoint to buy $4 million in ISA contracts. But he had bigger plans: for the benefits of ISAs to truly permeate the market, he reasoned, schools needed to package and sell students’ income streams to investors on a large scale. Only then would market forces really kick into gear, putting downward pressure on tuition prices. Schools that didn’t produce high-earning graduates would not get paid and would be forced to close.

Trafton conceived of an online marketplace where schools could sell ISA bundles to investors. He recruited his friend Christopher Ricciardi, a former Merrill Lynch banker whom the Wall Street Journal dubbed the “Godfather of CDOs,” to help design it. Together, Ricciardi and Trafton created Edly, a slick website where investors can shop for students—Amazon for ISAs. Edly’s first offering was a tranche of eighty-two ISAs from Holberton, sold last spring to six unnamed investors for $2 million.

At first glance, Edly looks like any other investment website. There are line graphs sloping upward, suggesting exciting returns. There are brightly colored pie charts demonstrating how investors could divide their assets. But in this case the assets are people. Edly’s pie charts divide students into groups on the basis of their likely future earnings, allowing investors to estimate returns by calculating how long it might take a particular group to find jobs; what their starting salaries might be; how many of them might default. On Edly, investors can put down money on a cluster of students, but other platforms have gone even further. For a time, Avenify, another ISA startup, allowed investors to bet on individuals by sharing their courses of study and GPAs.

It isn’t hard to imagine the effects that such a system would have on students. For example, Purdue, which has now issued ISAs to more than 900 students, assumes that those who major in the humanities will make less money over time, and therefore requires them to sign over a higher percentage of their future earnings than students majoring in math or science. A comparison tool on Purdue’s website offers an economics major seeking a $10,000 ISA a rate that is 25 percent lower than a prospective African-American studies major, nudging students toward professions that are more lucrative.

When Trafton announced the sale of Holberton ISAs, he said buyers could expect a 16 percent return over four years—nearly double the average rate of an S&P 500 index fund, and about the same rate advertised by Berkshire Hathaway, Warren Buffett’s holding company. Trafton promised that investors could “do well” by “doing good.” “Holberton School and investors on Edly all succeed only when students succeed,” read a press release touting the deal, “aligning school success with student success.” Over the past two years, Edly has sold investors the rights to the future incomes of students in a wide variety of programs—from a sales training institute in Texas to a welding school in Louisiana. When I spoke with Trafton, he told me that investors would get paid only if students graduated and thrived, and a school would begin to see a profit only after investors were paid back. Thanks to the beauty of this financial instrument, he said, everyone was on the same team.

When I began talking to Holberton students, however, I heard a different story. Many of them told me they felt like test subjects in a pedagogical and financial experiment. Even those who were initially excited about the program had come to view it as a bad deal. “You go into their warehouse—you google ‘how to become a programmer,’ ” Michael Klein, a former Holberton student, told me. “You keep doing that for nine months. And boom: you owe them seventeen percent of your income.” Klein quit his job as a teaching assistant to enroll in a Holberton course after hearing about it from a friend. He maxed out his credit cards to pay rent and buy food during the program. After seven months, he was told he would have to repeat three months of the course because his work wasn’t up to par. His finances strained, Klein was forced to drop out. Nevertheless, Holberton investors were still asking for 17 percent of his paycheck.

Essence Boayue, the Holberton student who criticized the school’s treatment of Simien, had spent years working in tech support before she signed up for the program. Even though she dropped out after six months, Boayue landed a job as a systems engineer. She doesn’t attribute her success to the school. “I basically just used their campus as a place to teach myself to code and apply for jobs,” she told me. “I am in all the promotional pictures for the school—because they don’t have any other black female students to rep them.” Seeing so many of her fellow students flounder, Boayue decided to do something about it. She started a chat room for Holberton students on the gaming chat platform Discord. Before long, more than a hundred Holberton students had joined.

Students shared stories about the pressure they were under. One student, who had taken on considerable debt to pay for food and housing while at the school, started to experience serious digestive issues that he believed were brought on by his anxiety. Before long, he was defecating blood in the Holberton bathrooms. Another student, who’d drained her savings while attending the school, started having panic attacks every morning on the train, thinking about how far behind she was. She’d arrive at Holberton struggling to breathe.

As they talked, Holberton students began noticing things about the school that didn’t add up. Holberton had told them that they’d made it through a highly competitive application process when, in truth, the school used a simple algorithm to assess applicants: almost everyone who bothered to finish the online application was admitted. The students also began to question Holberton’s advertised 92 percent job-placement rate. Boayue did an analysis of the forty-four students who had started in her cohort. She found that twenty had landed high-paying tech jobs and eighteen had dropped out of the program, meaning the real employment rate was around 45 percent. Boayue’s finding undermined Holberton’s central argument—that the school and its investors got paid only when students succeeded. Since the ISA vested after the first month of instruction, about a dozen people who had dropped out of the program were, like Simien, still on the hook.

The day after Simien was expelled from Holberton, he returned to work installing AV equipment in downtown San Francisco. “There goes that dream, and now I’m back to this shit,” he thought as he drove from job site to job site. “I was really depressed,” he told me. And then it got worse. After a six-month grace period, Simien got an email asking him to upload his pay stubs to Vemo, a platform used by ISA programs to facilitate monthly payments. Each month, Vemo would allow Holberton to keep tabs on Simien’s earnings. Whenever he seemed on track to make the $40,000 threshold—the equivalent of $3,333 in any given month—Vemo would send an email to remind him that he owed 17 percent of that income, or about $560 for the month. After taxes, that could be as much as a quarter of his paycheck.

Simien regularly exceeded that threshold—but just barely. He had tens of thousands of dollars in credit card debt, and the ISA payments stretched him to his limit. Angela, his girlfriend, told me that Simien’s face would tense up when he got an email from Vemo. He’d disappear into the bathroom, shaking his head. Those months were tough on Simien’s family, which was relying on his grandfather’s Social Security check to pay for groceries. “He’d hand me some bills when I was on my way to the store,” Simien recalled, “just slip them in my hand—that was the worst feeling.” They tried to keep costs down any way they could. “I’d even try to keep the lights off when I could, just to keep that electric bill down,” Simien’s grandfather told me. Still, most months, Simien was unable to make the full payment, and sent what he could—sometimes $200, sometimes $300. “I was trying to be a man about it,” he said.

Advocates stress that not all ISA programs are like Holberton’s—there’s no reason the agreements need to be attached to questionable schools or designed with punishing terms. Indeed, while market fundamentalists see ISAs as a way to tie education to profit, there are a fair number of progressive policy experts who want to use ISAs to build a more equitable education system. “If you squint from one angle, ISAs basically turned every person into a walking stock market,” Michael Stynes, the managing director at the Jain Family Institute, a think tank that helps design ISAs, told me. “But if you squint from the other side, you can see the backbone of a much more progressive educational system, in which low-income students pay less for education than their high-income peers. You’ve basically reinvented the progressive income tax.”

Barbara Dudley, the former executive director of Greenpeace and a founding member of the Oregon Working Families Party, was once a vocal proponent of ISAs. While teaching a public-policy course at Portland State University, in 2013, Dudley asked her students to design a solution to the student-debt crisis. To her surprise, they seized on the notion of an ISA. “They didn’t want free college—they liked the idea of paying back in proportion to their own success,” she said. The publicly run ISA program Dudley’s students came up with, which they called Pay It Forward, resembled Social Security. Graduates would put 1 to 3 percent of their incomes into a pot of money that would be used to support future students.

Dudley’s class was so enthusiastic that they pitched the idea to Michael Dembrow, a member of the Oregon state legislature, who convinced his colleagues to consider a publicly financed ISA program. Twenty-four other state legislatures across the country debated similar proposals that year. “At first, it sounded like a super-sexy one-hit wonder,” said Sarah Pingel, an analyst with the Education Commission of the States. “But states started seeing the cost, and said, ‘Whoa, whoa, that’s too expensive.’ ” Offering ISAs to a thousand students in Oregon, for example, would have required $20 million to start the renewable pool of capital that would be replenished as students graduated, got jobs, and paid back in. “We had a progressive state legislature, and they didn’t think it was worth the up-front investment,” Dudley said. “After that, I lost heart.”

While lawmakers have yet to direct a major sum of public money toward ISAs, there are some public institutions experimenting with the idea. The San Diego Workforce Partnership—one of nearly six hundred Workforce Investments Boards established by Congress in the late Nineties to help train American workers—has been offering ISAs to fund training in data administration, design, and manufacturing, among other industries. Brooke Valle, the partnership’s chief strategy and innovation officer, told me she launched the ISA to make up for a serious shortfall in government funding. Her program was turning away hundreds of qualified applicants a year. ISAs, she reasoned, could bridge the gap. In 2019, she raised over $3 million for a pilot program with one hundred students. The money didn’t come from investors—or from the government—but rather from philanthropic organizations, including Google’s charitable arm. When graduates began making more than $40,000 a year, they started sending 6 to 8 percent of their salaries to the program. The money was then used to train a new batch of students.

Valle thinks that ISAs should be a major part of the American education and workforce-training landscape, but she is wary of how the financial instrument is developing. “It’s not surprising to me that ISAs driven by investors are driving the market at this moment—but it does sadden me,” she said. Not having to pay back investors allows her program to be flexible. “We try to talk people out of ISAs,” she said. “We want them to be one hundred percent sure this will work for them.”

Will Nelligan, a former staffer for the Democratic senator Tom Harkin and now a consultant who helps design ISA programs, including the one in San Diego, believes that ISAs can be leveraged as a progressive policy tool. He would like to see universities convert their multibillion-dollar endowments into ISA pools for low-income students. ISAs aren’t an intrinsically good or bad deal, Nelligan said. A well-designed ISA program would ensure that high-income graduates subsidize the cost of education for lower earners. Nelligan imagines a world where ISA investors get paid only when students actually succeed, a move that would shift the financial risk for educating students to banks, schools, and investors, and away from families. “Far, far too many Americans live on a knife’s edge while so many institutions seem to enjoy remarkable insulation from the fates of their customers and citizens,” he told me. “ISAs can help.”

Today’s ISAs, however, aren’t designed that way—many are a worse deal than federal student loans. Last year, Mark Kantrowitz, who sits on the editorial board of the Journal of Student Financial Aid, conducted an analysis comparing ISAs—at a level of $30,000, paid back at 12 percent of income over ten years—with federal student loans. Assuming a student was making $50,000 a year, the average amount for someone with a bachelor’s degree, Kantrowitz calculated that an ISA would translate to a loan with an 18 percent interest rate. Current interest rates on federal student loans range from 2 to 6 percent. And student loans have added benefits: they can be paid back with income-based repayment schemes, or even forgiven altogether for those who choose to work in public-interest fields.

Still, ISAs can be enticing for students who have already maxed out their student-loan options. That’s how twenty-nine-year-old Nikki Brooks ended up signing away 7 percent of her future income. Brooks had wanted to become a physician assistant ever since she tore her ACL playing high school basketball and was nursed back to health by a particularly caring PA. Earlier this year, she was accepted to a PA program at East Carolina University. She felt as if God had “opened a new door,” but she had no idea how she would afford to walk through it. Brooks had already racked up $82,000 in traditional student loans. When we spoke by phone, she told me that she has a traumatic association with that debt. Shortly after she finished a graduate degree in biological medical science, her first monthly $1,200 student-loan bill arrived in the mail. “I opened the envelope, and I actually felt physically ill,” she said. “At the time, I didn’t even make that much in a month.” So when she saw a post on Instagram about ISAs designed specifically for PA students, she was immediately drawn to the idea. Brooks signed an ISA through a private provider called Stride Funding. Like most ISAs, Brooks’s is limited; it will only be in effect for five years, and it is capped at twice the amount she borrows, in her case around $20,000.

Stride Funding was founded in 2018 by Tess Michaels, a former Goldman Sachs banker. Like Trafton, Michaels sells ISAs to investors; unlike Trafton, she decided initially to work only with impact investors, who may seek slightly lower returns, so that Stride can offer students like Brooks more attractive terms. Before granting a student an ISA, Stride analyzes their past performance, and games out their odds of success—underwriting the person as if they were a financial asset, like a house or a car. Michaels spoke to Brooks about her ISA terms before she signed. “For a long time, I always felt like I was the only person investing in my future,” Brooks told me, “When I heard people wanted to invest in future PAs and health care workers I thought, That’s the coolest thing.”

But altruistic investors can’t change the market incentives baked into the structure of ISAs. Just compare the 17 percent Simien signed away with the 7 percent Brooks did. For financiers, the difference in terms makes sense. Because Simien had no background in programming, and attended a school that selects students using a computer program, he was more of a gamble than Brooks, a woman with a master’s degree who’d been accepted into a competitive PA program. Investors willing to take a risk on Simien, then, should have access to a higher yield. But that logic can contribute to dangerous inequities, since students’ future incomes are bound up with factors outside their control, such as race, age, and gender. Ali Hamed, the co-founder of the investment firm CoVenture, says he has passed on nearly a hundred pitches from ISA providers because he isn’t convinced they are a good investment—and he doesn’t like the optics. “In 1865, we all decided that owning equity in people is a really bad idea.”

Even Friedman, the godfather of ISAs, recognized their similarity to indentured servitude, writing that “they are economically equivalent to the purchase of a share in an individual’s earning capacity and thus to partial slavery.” Trafton, too, acknowledged that there is currently nothing stopping an ISA provider from requiring a student to sign over 90 percent of her income for the rest of her life. That’s one of the reasons he backs the ISA Student Protection Act, a bill making its way through Congress that promises to regulate privately issued ISAs by, among other things, capping the percentage and amount of time that students can be obligated to pay. The bill’s backers include investors such as Trafton and the ISA-processing company Vemo, as well as many of the nonprofits and impact investors excited about ISAs.

Some consumer-finance advocates, however, see the bill as nothing more than an attempt to obscure the true nature of ISAs, codifying into law the notion that ISAs are “not a loan.” (One of the bill’s authors, the Indiana senator Todd Young, is fond of calling ISAs a “debt-free” financing option.) That bothers Joanna Darcus, a lawyer with the National Consumer Law Center. “ISAs are a new way of marketing debt. Period,” she told me. Darcus pointed out that the law would override any state-level attempts to regulate ISAs or shield consumers from predatory terms. In Illinois, for example, the legislature is considering regulation that would treat ISAs as old-fashioned debt, thereby banning providers from taking more than 5 percent of income. The federal law proposes a much higher 20 percent cap. In May, the Student Borrower Protection Center and the National Consumer Law Center filed a complaint against Vemo with the Federal Trade Commission, accusing the company of misleading students in its marketing materials by deflating the real cost of ISAs and inaccurately claiming they were cheaper than traditional student loans.

Senator Elizabeth Warren, a former professor of bankruptcy and consumer finance law, has emerged as a sharp critic of the ISA industry. In the summer of 2019, Warren sent a letter to a number of institutions offering ISAs—including Purdue—asking them to provide a detailed breakdown of their programs, including a list of investors and the terms for students. Staffers in her office have been studying the contracts, and they are not impressed. ISAs, Warren told me, sometimes offer the most exploitative terms in the private student-loan industry. She suggested that instead of “inventing new ways for the industry to saddle student borrowers with years of crushing debt, we should end the student-debt crisis by canceling student-loan debt and bringing down education costs.”

Barbara Dudley, the Oregon professor, sounded perhaps the most soulful note of caution about the trajectory of ISAs: What does it say about the prospects for education in this country, she asked, if we increasingly think of learning as merely a financial investment in a student’s future earnings? She worried that an education system powered by ISAs and financed by Silicon Valley and Wall Street would dramatically steer students away from the humanities. “I don’t see a lot of room for the elementary school art teachers.”

While Simien was struggling to make his payments, tech boot camps funded through ISAs were coming under scrutiny. In August 2019, California levied a $75,000 fine on the Lambda School, one of the most prominent programs, for operating without a license. A series of news investigations revealed serious shortcomings in the school’s curriculum and job placement numbers. In February, The Verge asked an outside expert, Ben Sandofsky, to review Lambda’s curriculum and assess whether it prepared students for the job market. “Students are going to struggle with very basic questions” in their first job interviews, Sandofsky concluded.

Holberton, too, caught the attention of regulators. In January 2019, a former student filed a complaint with California’s Bureau for Private Postsecondary Education that called Holberton’s curriculum “subpar.” The complaint sparked an investigation, and the bureau issued an emergency decision barring the school from collecting tuition. The school has appealed the decision, and is now allowed to offer a modified and discounted program. Simien’s girlfriend, Angela, told me that she read about the regulatory action in The Daily Beast. “I was sending the article to everyone in my family,” she said. “Everyone was like: ‘Thank you, Jesus!’ ” Simien stopped paying Holberton, and began paying back his credit card debt—he even had enough money to start pitching in again on groceries and other expenses. “I could finally breathe a bit,” he told me.

But the recent pushback hasn’t stopped ISAs from spreading. The value of the ISA market has doubled every year for the past four years. An analysis by Career Karma, a market-research firm, estimated that the ISA market would be worth half a billion dollars by the end of this year. As the novel coronavirus pandemic stretches on, a number of ISA providers are positioning themselves as low-risk opportunities for students who are worried about an unsteady job market. “During economic instability, income share agreements can be a great tool to make higher ed more accessible & lower risk,” read an advertisement for Lambda. The school negotiated a deal to continue operations in California and, in February, announced a plan to issue $100 million in ISAs.

Simien has watched the ISA market grow with bafflement and anger. “All this buzz is so weird,” he told me. “It’s gonna come out how much they are screwing people.” Looking back, Simien recognizes that he should have been more skeptical. He had thought the ISA would allow him to do what many of his new, wealthier San Francisco neighbors had done: go to school without assuming crippling debt. His disappointment in how things turned out has become more acute in recent months. He’s been unable to work during the lockdown—a problem San Francisco’s remote-working software engineers have largely avoided. When we last spoke, he sounded especially despondent. “In this city, people are deaf to what’s going on in other people’s lives,” he said. “If you have just a little bit of something, there’s always going to be someone ready to take it away from you.

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December 2020