Death of the Company-Sponsored MBA

Over the past few years, employer-sponsored training has continued to decline. The number of companies that sponsor an employee's MBA has dropped from 68% in 2011 to less than 30% today. I believe we can use income share agreements to increase company-sponsored training for all employees.

What is an ISA? 

Income Share Agreements (ISAs) are a debt-free alternative to student loans. Instead of going into debt, a student receives interest-free funding directly from a benefactor or fund. In exchange, the student agrees to share a percentage of future income with the lender.

There are five major components to an ISA agreement: 

  • Principal: The total amount that is given to the student. 
  • Income Share: The % of pre-tax income that is agreed to be shared with the fund provider. 
  • Maximum Payback Period: The maximum number of months that the student needs to pay the lender. 
  • Payback Cap: The maximum amount that the student needs to pay back to the lender. 
  • Minimum Income Threshold: The minimum level of income that the student needs to meet before triggering the income share agreement. 

Why do we talk so much about it now? What has changed? 

ISAs aren’t a novel concept. It was initially shared by Milton Friedman and later tested by a group at Yale University. The tests were considered a failure because certain restrictions such as the payback cap weren’t in place to limit the costs incurred by the students. 

Recently, there’s been a couple of universities and vocational training schools (primarily coding) that have given their students the ability to fund their education through an ISA agreement. 

Industry ‘Makers’

Here are some of the interesting organizations in the ISA space based on Career Karma’s State of the ISA Market report

Purdue University: Rather than competing against federal loans, which often have low (and unsustainable) interest rates, Purdue’s Back a Boiler fund markets itself as an alternative to private student loans and Parent PLUS Loans. Funding is available to sophomores, juniors, and seniors in any major.

Lambda School:  Founded in 2016, Lambda School is a nine-month online program that’s free until you get a job. Instead of paying tuition, students can attend Lambda School for free, then pay 17% of their income for the first two years they’re employed (as long as making more than $50,000). Total payment is capped at $30,000, and students have the option of paying $20,000 upfront.

Leif: This company helps schools design custom ISA programs, and manage payments and compliance of ISAs. Leif has developed a platform that makes it easy for companies that offer ISAs to onboard new students quickly

Sharpest Minds: SharpestMinds is experimenting with ISAs in the context of mentorship. SharpestMinds allows people interested in data science to find a professional mentor who can help them become job-ready. SharpestMinds mentors help people practice for interviews, build their portfolio and resume, and offer access to career support to help people get hired.

FlockJay: FlockJay is a 12-week vocational bootcamp and offers students access to a high-quality education from industry experts in technology sales. FlockJay is one of the first non-coding bootcamps to explore ISAs, and are using ISAs to both increase access to their services — students don’t need to take out a loan to attend FlockJay — and align their incentives with those of their students. Students who attend FlockJay will pay nothing until they are hired, after which point they will share 10 percent of their salary for one year, capped at $9,000. Alternatively, students can pay $5,000 upfront to attend the course.

Today’s Work Trends

People change jobs faster than ever before. 

According to a study by the Department of Labor (released in August 2019), individuals born in the latter years of the baby boom (1957-64) held an average of 12.3 jobs from ages 18 to 52.

It’s safe to assume that the number of jobs held by individuals has only increased at an exponential rate with contract work and the gig economy emerging over the past 10-15 years. 

Contract / project work is becoming the norm. 

Freelance work is becoming a common part of people’s primary and secondary source of income. Check out the graph below from a study done by BCG earlier this year: 

While the geographic distribution is uneven, with higher levels of freelancers in China, India, Indonesia and Brazil, we’re still seeing a growing percentage of people taking on freelance work across the board. 

For example, it is projected that by 2023, more than half (52%) of the US workforce will either be gig economy workers or have worked independently at some point in their career.

The Decline Employer-Led Training

Employers are not investing enough in the training of full-time or contract workers. 

Training and development has historically been a benefit to permanent/full-time workers. The idea of training an employee who could potentially leave your company in a few months or years appears to be a poor investment. 

Training becomes an extremely tough challenge when someone needs to go through a structural skill change (e.g. an account payables coordinator learning to become a web developer). Employers don’t have a lot of incentive to ‘invest’ in their career transition. It is far easier to provide a severance package. 


Company Sponsored ISAs

I think there’s an opportunity for the emergence of company-sponsored ISAs designed to upskill employees, retrain former employees and train contract workers. Let’s take a look at both of these scenarios and understand the overall implications. 

Up-skill Current Employees

Going back to the analogy we started with, a company-sponsored MBA can be partially funded by the company and an ISA agreement between the employee and the company itself. If an employee decides to leave the company after getting the MBA, he/she would just pay back the company on a typical ISA term. If an employee stays with the company, they can pay back the company on a preferred ISA term (via a lower payback cap). Employees would be able to complete an MBA without incurring the typical $80-100k per year cost. Businesses (who are partially sponsoring the MBA) would also not have to worry about the risk of turnover. Schools would also be incentivized to work with businesses to create a program that actually helps employees to upskill and improve their overall performance. 

For contract employees, companies can still provide access to a ‘normal’ ISA with option of switching to a preferred ISA should the individual switch to having a more long-term working relationship with the company. 

Retrain Former Employees 

Most companies provide a severance package that is structured on the amount of time that the employee has worked at the company (the common multiple is getting 2-3 weeks of pay for every year that you’ve worked at the company). While this provides immediate cash flow relief, it does not solve the long term problem of finding a job that will keep that individual in the workplace. Company-sponsored ISAs can solve this problem by shifting some of the funding allocated to severance packages to provide a preferred ISA term (via a lower payback cap) for programs that will help employees transition to a completely different field. 

Conclusion 

The application of ISAs are still in its infancy. However, there is a growing need for employees to learn and upskill to remain employable. Company-sponsored ISAs can increase the accessibility of various programs/certifications designed to retrain/upskill employees without taking on any significant risk. 


By

Suthen Siva

October 11, 2019