The Lambda School, an online coding bootcamp based in San Francisco, on Thursday said it will lay off 65 employees, about a third of the workforce.
The staff cuts follow a settlement announced earlier this week with the California Department of Financial Protection and Innovation that requires the school to remove deceptive language from its student contracts.
The department argued that the school's contract with students violated the California Consumer Financial Protection Law, which took effect at the beginning of the year and was enacted in response to predatory financial practices following from the COVID-19 pandemic.
Lambda School offers students the option to finance tuition by deferring payment until after they graduate and get a job, whereupon they're contractually obligated to repay the cost of their education from their salary.
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The school's Income Share Agreement (ISA) with students falsely stated that the amount owed constituted a "qualified student loan" that would persist as an obligation even if the student declared bankruptcy.
That's not the case and Lambda School has agreed to have its financing contracts reviewed for legal compliance and to correct misleading marketing claims.
ISAs have become a popular repayment scheme in recent years and are offered by several dozen colleges and bootcamps. But unlike loans, where the law recognizes specific rights for borrowers and creditors, ISAs have no legal definition beyond the fact that they're contracts.
"ISAs are financial products, drafted by lawyers, often structured to provide an attractive return on the investment of funders or private investors," wrote Senator Elizabeth Warren and Congressional Reps. Ayanna Pressley and Katie Porter in a June, 2019 letter [PDF] to then Secretary of Education Betsy DeVos. "They carry many common pitfalls of traditional private student loans – with the added danger of deceptive rhetoric and marketing that obscure their true nature."
The lawmakers expressed concern that ISAs contain exploitative terms, like mandatory arbitration agreements and class-action lawsuit bans, and they're not subject to oversight by financial regulators.
One month later that year, a bipartisan group of US Senators proposed a bill titled "ISA Student Protection Act of 2019" to better define the legal parameters of ISAs. It contained impoverishment safeguard provisions like a minimal income level below which ISA payees would no longer be obligated to pay a percentage of their salaries. But the legislation never received a vote.
In a blog post, Austen Allred, co-founder and CEO of Lambda School, revealed the restructuring plan, which includes a temporary halt to enrollment in the school's part-time programs, and went on to defend ISAs.
"Lambda pioneered the income share agreement (ISA) in the career and technical education space, and we're now watching many of the schools who followed us abandon their ISA offerings because they believe it's impossible to make this model work," he wrote. "We strongly disagree."
On Twitter, Allred has staked out a still stronger stance, extolling how much better ISAs are than traditional loans – having revamped Lambda's ISA terms in February – and declaring that it's ISA-or-bust for the Lambda School.
"It’s entirely possible that in the next 12 months nearly every school stops offering ISAs," he said. "In fact, I think that’s the most likely outcome. Lambda School is in it for the long haul, though. It’s interest-aligned tuition or nothing at all."
While it's not difficult to find Lambda School detractors, there's also data that suggests some students prosper from their coding bootcamp experience. According to Course Report's 2020 Coding Bootcamp Alumni Outcomes & Demographics Report, published in March, 2021, "Students who used an ISA or Deferred Tuition actually report higher average salaries – ~$79,000 on average compared to those who opted out of an ISA/Deferred Tuition Plan and earn ~$69,500/year."
Lambda School has come under fire for claiming that it only makes money when its students make money, even as it reportedly sold half its ISAs for $10K each in 2018 to a hedge fund as if the tuition contracts were any other speculative financial instrument.
This is just the sort of scenario Warren, Pressley, and Porter warned about in their 2019 letter.
"The opportunity for private investors to profit from ISAs – and even sell their investments on Wall Street, just like private student loans – demonstrates the core misalignment between the interests of ISA funders and investors and the best interests of students," the lawmakers wrote.
"It also creates an incentive for funders and private investors to generate as much profit as possible from ISAs – a dangerous scenario for students." ®