Can Pay after Placement/ ISA Models Reimagine Upskilling in India?

What is Pay after placement model?

Pay after placement (or Income Sharing agreement) is a debt-free alternative to education loans. In ISA, once a student is placed, she/ he pays a certain percentage of their monthly income for 2–3 years as the cost of the education program. The repayment starts only after the course ends and the student lands a job (of a minimum amount per annum) and continues till a payback cap is reached

The concept of ISA was first proposed in 1955 by Milton Friedman. It envisioned an equity investment in individuals which allowed investors to buy ‘shares’ in future earnings. In the 1970’s Yale University put the idea into execution and launched the ‘The Tuition Postponement Option’. The program was however dubbed a ‘failure’ and eventually stopped in 1999. This was because the highest earners would usually prepay and opt-out which left the rest of the group to bear the burden with lower salaries

ISA model came back to prominence through ‘learn-to-code’ boot camps in the USA when App Academy launched in 2012. The concept however became popular with the rise of Lambda School which was founded in 2016 (raised $74M in Series C in Aug 20).

Over the years ISA has expanded to other emerging tech jobs and been piloted in few universities

The biggest benefit of ISA is that it aligns student’s outcomes, industry requirements in terms of skill sets, and the course structure/ curriculum and is hence seen as transformative for certain disciplines in higher education

Why has it picked up in India?

The student loan debt market has reached an astounding $1.6T in the USA in 2020 (~7.5% of 2019 GDP). By 2023, an estimated 40% of the borrowers could default on their student loans. Shifting loans to income-based repayments hence makes a strong case for certain professions in the USA.

India is also witnessing startups that leverage ISA models with early signs of investor interest. Why is that?

In India, only 35% of students are placed at the end of an MBA program. An Aspiring Minds Study in 2017 concluded that 95% of engineers in India are not fit for software development jobs with a mismatch in job requirements and course curriculum.

9M college students graduate each year but a massive demand-supply gap means that 75% don’t make it to the white-collar workforce. As college enrolments increase 3x over the next 7 years and the white-collar job creation market remains tepid, India will need to export its talent globally and serve as the first destination for emerging tech jobs in MNC’s, businesses, and startups

‘Pay after placement’ model has emerged as a viable alternative to tackle this quality conundrum and ensure that colleges focus on not just churning out graduates in bulk but to ensure that they provide them with viable jobs at the end

The benefit for students is immense as it eliminates the financial risk with minimal need to take an education loan upfront, rebuild trust between the colleges and students. It also enhances student’s social prestige and self-confidence when they start repaying from their own hard-earned money

In a typical student loan, the students must pay during the course duration (anywhere from a few lacs to up to 35 lacs). If she/ he is left unplaced in the end, it puts them at significant financial risk.

For corporates, it helps them find quality candidates saving significant time, money (on recruitment and search costs), and effort. ISA also fits right at the center with the corporates moving towards skill-based hiring. It makes them confident in the quality of graduates and ensures they hire for industry-aligned skills. Many corporates (such as Infosys, Wipro) set up their own captive training arm in-house for new joiners which can be reduced as hiring through ISA model scales

Notable Players and models

Typically, students pay 15–17% of monthly salary to the institution for the first 2–3 years with an upper cap of Rs. 2.5–3 lacs in India

Some of the prominent players (not exhaustive!) and their details are as below:

Greyatom has an impressive placement ratio of 88%.

Some such as Masai School have started a part-time course for working professionals (3hr daily in the evenings for eight months. Pay course fee if the salary is 1.5x of what they are earning). The impact of Masai School is phenomenal. It has students from 21 states, 57% with non-CS background, 68% from non-metro cities, and 65% from the EWS category.

Women who code!

Most of these players have attracted investor interest and it’s not hard to see why. A confluence of rapid digitization leading to a huge demand for professionals adept in data science, software dev, big data analytics, etc., growing acceptance of remote working, and the inability for most engineering institutes to keep pace with the rapid changes required in course curriculum means that the timing is right

Add to that are the super attractive unit economics for these players. Pesto’s founder Ayush mentioned that they enjoy gross margins of 80–85% and will be profitable at a unit level by May 20.

A rough conservative analysis for GreyAtom based on its FY18 and FY19 financials shows that it enjoys an LTV/ CAC of between 12–14x

Attractive unit economics

With UE in place for most players, the bigger question to solve for is the scalability of unit economics especially when short-term courses with low ticket sizes are offered to increase student intake numbers. The second is to ensure adequate job supply which brings us to the next section

Challenges

Maintaining learning quality, availability of high paying quality jobs, and managing the WC gap are the crucial pillars to scale for these players

For startups

InterviewBit’s founder Abhimanyu also acknowledges this and mentioned that once they start training 10K students per year, they might hit the ceiling of job availability. Mid to long-run focus is to help global companies set up their India offices and increase demand for the trained candidates

If the supply side is not adequately managed and placement rates dip it could lead to confidence loss among the students increasing the cost of acquisition. For instance, Pesto Tech places students with an avg. salary of 30 lacs per annum which is excellent but could become harder as it scales its batches and student intake

Another big challenge is managing working capital as the costs of running the course is borne upfront while student repayment starts only once the course ends (which is typically 12–18 months).

Theoretically, companies with high current ratios are more liquid. However, in the example above, the CR is moving from 4.4x to 6.5x in five years. That could be risky if students stop paying/ refuse to pay (as there are no laws to regulate the space). From an RoI perspective, while this is great for a student, startups will need to plug the gap either through vocational skill financing players (Propelld, Credenc, Eduvanz, Shiksha Finance, Credelia, etc.) or take short term loans from financing institutions

Capex and operating costs (classroom, facilities, staff costs, etc.) could add to the scaling-up challenges for residential/ on-site programs startups such as Sunstone Eduversity

Startups will need to keep the course duration short (ideally between 6–9 months) to reduce the time for students to graduate, land a job and start repaying

Another risk is that ISA’s are not legally enforceable and could be tough to implement if candidates refuse to pay up once placed or default

For students

Most startups have a concept of ISA Breach and students should understand all the T&C fully before signing an agreement.

The selection process to get a seat in the course is extremely competitive (akin to admission in the top IIM’s!). As startups have ‘skin in the game’ only the cream of applicants who have the required aptitude, initiative, and grit pass through the selection filter. Acceptance rates are in single digits for most and as low as 1% for some like InterviewBit. Pesto’s typical student has a CS degree with 2+ years of web development experience

The issue of what happens in case of attrition of the placed students within 1–2 years of getting a job and the remedial/ support steps offered by the startups could not be established

Road Ahead and summing up

As one startup remarks, ISA players are investing in the future and helping students build careers together. By democratizing access to education, it ensures that aptitude, skills, and hunger to succeed become the criteria to compete for students than access to finances or the ‘right’ network

Graduated students have received job offers which are 8–15x of their previous salaries which means that the model is working and lives are changing

In the future, startups which allow HNI’s/ angel investors to bet on the future potential/ capabilities of students at top tier institutes and take a portion of salary once they start working could become an interesting scope of expansion for ISA’s

‘Career accelerators’ where professionals are willing to repay a percentage of their future income in return for being upskilled with a 2–3x bump in salaries could emerge.

Alternate revenue streams such as career counseling, personal branding and interview prep, network creation, compensation negotiation assistance could be sprinkled in with the core offering

Overall while the future of ISA’s looks super promising for students and hiring partners, it could be a bumpy ride to scale for players in this space. I do hope that they continue to innovate, upskill, and become a global hub to export the best of talent from India.

Image Credits: Lambda School, YourStory

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of any institute or organization he is associated with.

Venture Capital, Blogger, Travel Enthusiast, Ex- Goldman Sachs