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As Democratic presidential candidates propose big solutions to fix the student debt crisis, a solution from the 1950s has captured the popular imagination in Silicon Valley. Germans have long used ISAs (income share agreements) to fund higher education, but the historically controversial alternative to traditional loans has never gained widespread traction in the United States.
Now startups are proposing income share agreements as a solution to a variety of problems, including education. When someone signs an ISA, they commit to paying a percentage of their future income in exchange for funding. That may not sound radically different from a student loan, but advocates argue that ISAs align the interests of both parties in a more constructive way.
After all, if you invest in the future of a student, you are incentivized to further their career as a means of maximizing your return. And if a graduate is in between jobs, or chooses to pursue a less lucrative career, they aren’t burdened with crippling debt.
Blair, a startup backed by Y Combinator, was founded in 2019 by three German entrepreneurs. The company offers up to $50,000 in exchange for an equity stake in the future earnings of each student they fund. I spoke with the team to discuss the student loan crisis, the controversy surrounding ISAs and how they plan to maximize the potential of every student they invest in.
This transcript has been edited for brevity and clarity.
What problem are you solving?
Mike Mahlkow: The very first problem we’re solving is access to higher education. There is a subset of students in the United States that don’t have enough access to funding, and so they drop out. That’s the very first problem we have to solve — access to education.
The second part is affordability. At Blair, we enable students to pay for college and protect their downside at the same time. That’s super important to us, and one of the most important reasons why we started this company.
Back home in Germany, 40% of students use income share agreements, which shifts your whole thinking about higher education. It gives you peace of mind and a sense of freedom.
These are the two main problems we’re solving, and then there’s one subproblem that we also address. Many students, actually most students, don’t feel prepared for the job market. And since we not only provide funding, but also help students get their first job, we accelerate their careers.
Wait, you’re telling me that 40% of German students use ISAs?
Mike Mahlkow: Oh yeah. So, some important context, most of the education in Germany is public, and therefore free. But at private universities in Germany, where you have to pay a lot of money, ISAs are prevalent. In the case of our three alma maters, which are three different private universities, on average 40% of students are using income share agreements.
Is this like the metric system? Is the rest of the world hip to ISAs, while the US is woefully out of touch?
Mike Mahlkow: (Laughs) I don’t think it’s to that same degree.
One of the main reasons why it took off in Germany 15-20 years ago is that private universities weren’t really a thing in Germany before that. When they picked up steam, experts saw an opportunity to start with a blank slate. They explored all the options with no baggage. And now that private universities are more and more prevalent, ISAs have started to gain steam.
In the US, however, there are two main problems. One of the problems is that there have been experiments with ISAs before. I don’t know if you’re familiar with the Yale experiment in the 70s…
Sounds like the Manhattan Project. What was the Yale experiment?
Mike Mahlkow: So Yale tried something like income share agreements, but they had a couple of structural issues. Basically everyone in one year, at Yale, got their tuition paid, and then they had to repay the whole sum until everyone’s tuition was covered. And there was some backlash because some students earned a lot of money and had to subsidize all the other students.
Since it failed fairly publicly in the 70s, there was a lot of scorched earth in the US. It failed again in 2011 when a few startups tried it. Also, regulation has been unclear, but this is changing.
Subsidies aren’t super popular over here. Would you say Yale’s early implementation of ISAs challenged our need for individualism?
Mike Mahlkow: That’s a very good summary. I hadn’t thought about it like that.
Given that history, why did you decide to launch in the US market?
Mike Mahlkow: The US is by far the biggest market for student loans. Depending on which estimate you believe, more than 80% of the student debt worldwide is located in the US. So it is just by far the biggest market, and it makes the most sense to build a student financing product in the US as opposed to any other country.
I can’t picture a bank underwriting something this experimental. Where does the money come from?
Mike Mahlkow: There are two separate funding mechanisms. On the one hand, we have the VCs and traditional angel investors who invest equity into our company. That pays for the bills and pays for the software. That’s the company. That’s basically Blair.
And then we have our student funds. The people and institutions that invest in our student funds are separate from those that invest in the company. Theoretically, they could invest in both, but these are two separate funding mechanisms. For our first fund, we had high-net-worth individuals and a foundation that gave us money to invest in the students. And we’re currently talking to institutional investors to build a more scalable financing structure on the income side.
So like limited partners?
Mike Mahlkow: Yeah, new asset classes usually start with high-net-worth individuals — people who are a little less risk averse. And then you just step up the ladder. The more data you have, and the more proof you have, the more risk averse the institution can be. At some point, Blair should definitely be a product that banks and insurance funds can invest in, but it’s not there yet.
Who do you look at as competition?
Mike Mahlkow: There are two different ways of looking at it. One way is, how do students currently get their student financing? And those are the biggest competitors. Companies like Sallie Mae, or SoFi or CommonBond — just large student loan providers.
We compete with them because students can get loans as opposed to income share agreements. And these companies are by far our biggest competition right now, just because there are way more loan providers than ISA providers.
And there are ISA companies. They’re more like direct competition in quotation marks, but that’s not what we are currently focusing on. We’re focusing on getting a share of the student loan market. And that’s important, if you look at the scale of where we are, and where the market is in general.
You just want to see the market for ISAs grow?
Mike Mahlkow: Yeah, if the market grows that’s really good for us, right? If we have more ISA competition, to a degree obviously, that’s also beneficial.
Offering career services is a smart way to maximize the earning potential of students, while increasing your returns. Was this part of your founding thesis, or a discovery you made along the way?
Mike Mahlkow: That was actually part of our founding thesis. We’ve always looked at ISAs holistically. ISAs themselves aren’t really new, right? We were super familiar with them during college and we had already done research into ISAs.
So we were familiar with ISAs in general. And we knew what worked and what didn’t work. So for us, the holistic concept was something we all believed in from the beginning, and it’s also something we’re super passionate about.
The last company we built was focused on making students more employable. So we just used what we already knew, and what we were already good at, to help students get further.
Is Blair product-driven or market-driven?
Constantin Schreiber: We definitely consider Blair a product-driven company. We have different areas where we provide students additional value beyond just the funding. For example, we provide them with tools to estimate their starting salary, a CV builder, and so on. So it’s really about the features we provide to the students and, down the line, the investors.
David Nordhausen: We understand that the student loan market is big, and the vast majority of users are deeply frustrated, but it’s built into our culture to build the best possible product.
So you don’t have to win on product, that’s just who you are.
David Nordhausen: Yeah.
Mike Mahlkow: But sales still has to be a component of any company, right? We just want to build the best possible product, and then sell it. That’s much much easier than building a low-quality product and then put effort into selling it.
Key Takeaways
- Providing career services increases Blair’s appeal and maximizes its ROI.
- Funding for higher education is broken, so the market’s open to alternatives.
- It might be an uphill battle convincing Americans that Europe has the solution, even if ISAs were conceived of by an American economist.