Flipping the Economics of Paying for Education, Because They’re Upside Down

It is a model that so far has been aimed at vocational education but has the potential to end the crushing cycle of student debt and change the way schools think about students.
“It aligns the incentives fully,” said Mr. Lewis, the venture capitalist.

The school is incentivized to only enroll motivated students who won’t drop out; it is incentivized to successfully teach them the skills they will need on the job; it is incentivized to find them a job; and it is incentivized to make sure they are a success once they’re on the job because the school relies on employers to keep hiring its graduates.

“There are no schools that are incentivized to make their students successful anywhere,” said Austen Allred, co-founder and chief executive of Lambda. “The schools get paid up front, they get paid in cash, whether that’s by the government or whether that’s by an individual doesn’t really matter. At the end of the day, the schools get paid no matter what.

“I think in order to create better outcomes the school has to take the hit,” he said.

Mr. Allred said he doesn’t see Lambda as a replacement for a four-year education — yet.

“What we’re built to do right now is close employment gaps,” he said. “So if you have a field where there is a shortage of employees the obvious place for us to start is by building programs to fill those holes.”

Whether this model can — or should — be applied to the larger education system remains an open question. It clearly improves the financial incentives for the school and the student. But, if expanded more widely, it could press programs to ignore a traditional liberal arts education, where the earning power is reduced. If a student dreamed of a major in Russian literature, she may struggle to find a school that sees a knowledge of Tolstoy to be particularly marketable.

It also means schools may not be willing to take a chance on a promising but higher-risk student.

“Is it a bad thing to say that schools are going to be for people who are motivated to succeed in said school?” Mr. Allred asked. “I look at some of the predatory, for-profit educations that just don’t care. I don’t think that’s a win for anybody, including the students. I think schools should be actively trying to determine who will be successful and that’s part of your job. Harvard does that, right?”