Wall Street is driving income share agreements behind the scenes

Fintech lenders and regulators don't agree on whether income share agreements are loans. But Wall Street sees a big opportunity nonetheless.

 A diploma illustrating criticisms of income share agreements

Income share agreements have graduated to Wall Street.

Image: Christopher T. Fong/Protocol

A debate over the benefits of income share agreements is erupting in state capitals and Washington, chiefly over whether the programs that pay tuition in exchange for a share of students' future salaries are just repackaged student loans. But Wall Street, always eager for more revenue streams it can package and resell, isn't quibbling over the distinctions. The securitization of these fintech creations is raising some of the same questions mortgage-backed securities once did: Who's profiting, and how do their interests affect or even distort the products being offered?

In the case of income share agreements, the product is an education, ranging from a traditional four-year degree to a coding bootcamp certificate. Schools and fintechs powering the agreements pitch them as an innovative way for students to access education. But some advocates say that ISAs deceive students and can end up costing them much more than they would have paid with traditional loans.

The widespread securitization of income share agreements raises a different issue: Do educational institutions retain any interest in the kind of jobs their students end up getting? Part of the pitch of income share agreements is that they align schools' and students' interests. But to the extent that Wall Street parcels off the risk and reward to investors, that promise doesn't hold up.

States such as California, Illinois, Colorado and Washington have recently issued new guidelines for ISAs, including some rulings that ISAs are loans and must be regulated more tightly. The Consumer Financial Protection Bureau recently issued a consent order against Better Future Forward, an ISA company, for misleading borrowers by saying ISAs are not loans.

"Because of the novelty of ISAs, there has always been significant uncertainty about where they fit within existing regulatory regimes. Nonetheless, since the beginning [Better Future Forward] has developed and used disclosures built around the principles of federal disclosure laws," a company spokesperson said in a statement.

The wholesale finance back end of ISAs, a multilayered system that turns promises of future payments into marketable securities, is getting far less scrutiny.

One of the big facilitators of this system is startup Edly, a 2-year-old New York company bringing sophisticated Wall Street-style loan securitization to a seemingly innocent corner of education. On its website, it advertises "great schools, great returns" from students at universities such as MIT, Stanford and Columbia with starting salaries as high as $132,000, as well as students at coding bootcamps such as Lambda School.

Income share agreements have a number of similarities to mortgage-backed securities and their synthetic cousins, collateralized debt obligations. Those financial instruments were at the heart of the 2008 financial crisis. Like borrowers during the real estate boom who quickly signed balloon mortgages, ISA borrowers may not always understand what they're responsible for paying back and under what conditions. And like mortgage-backed securities, the contracts are packaged and sold off to investors who may not scrutinize what's inside the securities.

The connections are not just theoretical. Edly was founded by former finance gurus including Christopher Ricciardi, dubbed the "grandfather of CDOs" by the Wall Street Journal. Ricciardi had previously helped Wall Street capitalize on subprime mortgages. He then became a master of bundling asset-backed securities into collateralized debt obligations, which were then sliced and diced into tranches for investors. In 2017, Ricciardi joined FlowPoint Capital Partners, which helped create a new asset class by buying income share agreements. Ricciardi's firm attempted to determine what a degree was really worth.

ISA loans are typically offered by schools or ISA providers, which partner with Edly, which sells them to investors. Edly operates an online marketplace for investors to buy the ISA contracts.

As of January, Edly managed more than $20 million in ISAs, according to an investor brochure circulated in February. Edly charges investors management fees including a percentage of cash flows, according to its website. Edly also works with ISA servicers that also get paid a fee that can be as high as 5% of cash flow, according to the brochure.

For ISA investors, Edly's managed account, which invests in different schools in different areas and student industries, offers a target yield of 14%, according to Edly's crowdfunding prospectus.

One partner Edly has worked with is Lambda School. Here's the arrangement: Lambda gets paid a certain amount upfront, then when former Lambda students get a job above a certain income threshold, they start to pay back the ISA and that cash flow goes to investors until the investors get a 13% return, according to a Lambda School and Edly investor presentation obtained by Protocol.

Anything that students pay after investors reach the 13% threshold is split, 60% to Lambda and 40% to investors. The split aligns incentives and ensures the school also wants students to succeed, Ricciardi said in the presentation. "So, it's really important that we have that upside for Lambda in that shared risk. That's really what makes the whole thing work in ISAs, in our opinion," Ricciardi said, according to a transcript.

"When we purchase contracts from schools, we ask them to have a significant alignment of interest in the student outcomes," said Ricciardi in a statement to Protocol.

But the incentives of upfront payments and the creation of demand from ISA investors could have unintended consequences. One potential effect is to boost efforts by schools to bring in more students to meet that demand, regardless of how well the students perform. At Holberton School, an institution that works with Edly, "almost everyone who bothered to finish the online application was admitted," Harper's reported last year.

That's where the mortgage boom that preceded the bust echoes most loudly: In the runup to the 2008 crisis, mortgage-backed securities fueled demand for more home borrowers, regardless of credit score.

"When you have the opportunity to sell investors something with so much demand you will do whatever you have to to get the materials to make the stuff to sell it," said Ben Kaufman, head of investigations and senior policy adviser at the Student Borrower Protection Center, a nonprofit advocacy group. "And that's how a race to the bottom starts with regard to underwriting."

Income share agreements are often marketed as a way for people to get jobs in the high-paying tech sector. But some former students have sued, claiming that they didn't get adequate training and still had to pay back big bills. In May, former students sued Lambda School alleging false job placement numbers and deceptive marketing. In July, former students sued Make School, a former coding school that has since liquidated, and Vemo, which serviced Make School's ISAs.

Students at Holberton said that the school had a misleading job placement rate of 92% and didn't prepare them well to get jobs — and that since their contracts became effective one month into their schooling, they had to pay back the fees regardless of whether they even finished the program.

"Coding bootcamps have cloaked themselves in the language of aligned incentives," said Kaufman.

For its part, Edly is telling investors the same thing. In a brochure reviewed by Protocol, it said it looks for students who will land jobs that have the best potential to pay back the loans. It uses data on graduation and placement rates, salaries and time for graduates to find a job in order to find the highest "return on student investment."

But it's not clear if that data takes into account the distorting effects of the incentives players like Edly are introducing. No less an authority than Alan Greenspan, the former chairman of the Federal Reserve, told Congress that bad data from "a period of euphoria" distorted the models that Wall Street relied on. It could be a costly education to learn that lesson twice.


Netflix’s layoffs reveal a larger diversity challenge in tech

Netflix just laid off 150 full-time employees and a number of agency contractors. Many of them were the company’s most marginalized employees.

It quickly became clear that many of the laid-off contractors possessed marginalized identities.

Illustration: Christopher T. Fong/Protocol

After Netflix’s first round of layoffs, there was a brief period of relief for the contractors who ran Netflix’s audience-oriented social media channels, like Strong Black Lead, Most and Con Todo. But the calm didn’t last.

Last week, Netflix laid off 150 full-time employees and a number of agency contractors. The customary #opentowork posts flooded LinkedIn, many coming from impacted members of Netflix’s talent and recruiting teams. A number of laid-off social media contractors also took to Twitter to share the news. It quickly became clear that similar to the layoffs at Tudum, Netflix’s entertainment site, many of the affected contractors possessed marginalized identities. The channels they ran focused on Black, LGBTQ+, Latinx and Asian audiences, among others.

Keep Reading Show less
Lizzy Lawrence

Lizzy Lawrence ( @LizzyLaw_) is a reporter at Protocol, covering tools and productivity in the workplace. She's a recent graduate of the University of Michigan, where she studied sociology and international studies. She served as editor in chief of The Michigan Daily, her school's independent newspaper. She's based in D.C., and can be reached at

Sponsored Content

Why the digital transformation of industries is creating a more sustainable future

Qualcomm’s chief sustainability officer Angela Baker on how companies can view going “digital” as a way not only toward growth, as laid out in a recent report, but also toward establishing and meeting environmental, social and governance goals.

Three letters dominate business practice at present: ESG, or environmental, social and governance goals. The number of mentions of the environment in financial earnings has doubled in the last five years, according to GlobalData: 600,000 companies mentioned the term in their annual or quarterly results last year.

But meeting those ESG goals can be a challenge — one that businesses can’t and shouldn’t take lightly. Ahead of an exclusive fireside chat at Davos, Angela Baker, chief sustainability officer at Qualcomm, sat down with Protocol to speak about how best to achieve those targets and how Qualcomm thinks about its own sustainability strategy, net zero commitment, other ESG targets and more.

Keep Reading Show less
Chris Stokel-Walker

Chris Stokel-Walker is a freelance technology and culture journalist and author of "YouTubers: How YouTube Shook Up TV and Created a New Generation of Stars." His work has been published in The New York Times, The Guardian and Wired.


Crypto doesn’t have to be red or blue

Sens. Cynthia Lummis and Kirsten Gillibrand are backing bipartisan legislation that establishes regulatory clarity for cryptocurrencies. This is the right way to approach a foundational technology.

"Crypto doesn’t neatly fall along party lines because, as a foundational technology, it is — or should be — inherently nonpartisan," says Diogo Mónica, co-founder and president of Anchorage Digital.

Photo: Anchorage Digital

Diogo Mónica is president and co-founder of Anchorage Digital.

When I moved from Portugal to the United States to work at Square, it was hard to wrap my head around the two-party system that dominates American politics. As I saw at home, democracies, by their very nature, can be messy. But as an outsider looking in, I can’t help but worry that the ever-widening gap between America’s two major parties looms over crypto’s future.

Keep Reading Show less
Diogo Mónica
Diogo Mónica is the co-founder and president of Anchorage Digital, the premier digital asset platform for institutions. He holds a Ph.D. in computer science from the Technical University of Lisbon, and has worked in software security for over 15 years. As an early employee at Square, he helped build security architecture that now moves $100 billion annually. At Docker, he helped secure core infrastructure used in global banks, governments and the three largest cloud providers.

What downturn? A16z raises $4.5 billion for latest crypto fund

The new fund is more than double the $2.2 billion fund the VC firm raised just last June.

A16z general partner Arianna Simpson said that despite the precipitous drop in crypto prices in recent months, the firm is looking to stay active in the market and isn’t worried about short-term price changes.

Photo: Andreessen Horowitz

Andreessen Horowitz has raised $4.5 billion for two crypto venture funds. They’re the industry’s largest ever and represent an outsized bet on the future of Web3 startups, even with the industry in the midst of a steep market downturn.

The pool of money is technically two separate funds: a $1.5 billion fund for seed deals and a $3 billion fund for broader venture deals. That’s more than other megafunds recently raised by competitors such as Paradigm and Haun Ventures.

Keep Reading Show less
Tomio Geron

Tomio Geron ( @tomiogeron) is a San Francisco-based reporter covering fintech. He was previously a reporter and editor at The Wall Street Journal, covering venture capital and startups. Before that, he worked as a staff writer at Forbes, covering social media and venture capital, and also edited the Midas List of top tech investors. He has also worked at newspapers covering crime, courts, health and other topics. He can be reached at or


How Amazon built its kid-focused Glow video calling projector

Robots, laser pointers, talking stuffies: Amazon’s devices team went through many iterations while developing its very first interactive projection device.

The Amazon Glow is the first interactive projection device sold by Amazon, and it could be a stepping stone for the company to use the technology in other areas.

Illustration: Christopher T. Fong/Protocol

Cats love chasing laser pointers. So why not have kids do the same?

When a small team within Amazon’s devices group began exploring the idea of a kid-focused video calling device nearly five years ago, they toyed with a lot of far-out ideas, a laser pointer controlled by an adult calling from afar being one of them. The suggestion was quickly dismissed over eye safety concerns, but it did lead the team down a path exploring projection technologies.

Keep Reading Show less
Janko Roettgers

Janko Roettgers (@jank0) is a senior reporter at Protocol, reporting on the shifting power dynamics between tech, media, and entertainment, including the impact of new technologies. Previously, Janko was Variety's first-ever technology writer in San Francisco, where he covered big tech and emerging technologies. He has reported for Gigaom, Frankfurter Rundschau, Berliner Zeitung, and ORF, among others. He has written three books on consumer cord-cutting and online music and co-edited an anthology on internet subcultures. He lives with his family in Oakland.

Latest Stories