The Dawn of Transparent Education

There’s a new alternative to student loans that aligns the incentives of students and educators. Say goodbye to the old education model, where students pursue education at any cost. It’s the dawn of Transparent Education.

You know there’s a problem with higher education in the United States when a recent best seller has the following title: The Case Against Education: Why the Education System Is a Waste of Time and Money. Higher education in the U.S. is at a crossroads, and a major reason why is debt.

The Debt Disconnect

Debt is a financial innovation that has driven capitalism for several hundred years. The chart below illustrates the overall level of household debt in the United States. Excluding around $9 trillion for mortgages to buy homes, the chart shows that Americans borrow the most to pay for college degrees, cars, and everyday spending on their credit cards.

studentdebtlevels
Credit: www.lenkiefer.com

There is nothing inherently wrong with debt, per se. All this debt is “good” to the extent in enables Americans to have a roof over their head, drive to work, and buy groceries. With regards to education, the $1.2 trillion dollars of debt would be “good” if American’s with college degrees earned enough after graduation to pay off the amount of debt necessary to obtain a college degree in the first place.

Unfortunately, this doesn’t seem to be the case.

earningsovertime
Credit: The Wall Street Journal

Earnings, relative to student loans, have remained largely flat over the last 15 years. There is a Debt Disconnect in higher education: the cost to provide students with new knowledge, skills, and tools, using traditional education models is “disconnected” from the wages that employers are willing to pay these students after graduation.

Low Visibility Education

The reasons for the Debt Disconnect are misaligned incentives between educators and students.

First, schools have better information than students about employment outcomes after graduation, but are often not incentivized to share this knowledge with students. Instead, schools are incentivized to focus on maximizing enrollment levels. In our article on higher education’s competitive moat, we described how this is partly explained by the need to utilize fixed assets like tenured professors, classroom buildings, and campuses. In other words, the drive to maximize enrollments is embedded in the distribution model of higher education.

The second reason for the misaligned incentives is low accountability at the Federal level for performance of student loans that are often used to finance education. Schools can offer students Federally subsidized loans without any practical limits. Student loan default rates post-graduation have to rise to the enormous level of 25% before colleges are at risk of losing the ability to offer these loans to students.

Finally, schools have no “skin in the game” as to whether or not students make a lot of money after graduation, or if they even graduate at all. Whether a student graduates or not, schools are still paid for the courses they provided. For evidence, consider that nearly 50% of students fail to get a degree or certificate within 6 years. Similarly, the exact level of a student’s income after graduation doesn’t impact the school, so long as the student is making a sufficient amount of money to pay back their loans.

The result of these factors is Low Visibility Education: students have low visibility about the career pathways and salaries their education will ultimately provide. Similarly, they have low visibility into the overall costs of their education and the duration of time required to complete it. The lack of transparency and misaligned incentives drive up costs, with subsidized Federal student loans adding even more fuel to the fire.

Making Post-Graduation Earnings “Visible”

To combat the problems above, over the last 10 years a small group of think tanks, lawyers, and politicians, have been refining an idea first proposed by Milton Friedman in the 1950’s: that students could finance their education through “equity investments such that [Investors] could ‘buy’ a share in an individual’s earnings.” The basic idea would be: invest in a student to learn a skill, and then share in upside as the student earns more money after graduation.

In 2009, a series of finance startups codified this idea using a new legal structure and began offering it to students in lieu of private or Federal student loans. The new legal structure is an agreement between investors and students called an Income Share Agreement (ISA). ISAs provide cash directly to a student to pursue a certain educational pathway. The cash is then paid back to the investor after graduation over a fixed amount of time. Repayment to the investor is only made when the student’s post-graduation income is above a certain threshold. Payments are limited to a modest % of the student’s post-graduation income. Finally, the repayment is capped in terms of years of repayment, and/or amount repaid.

The CEO of education startup, Lambda School, offers the most lucid explanation currently available in video form:

Initially, companies such as Lumni, Upstart, and SoFi offered equity investments to students directly, who would then pursue the educational opportunities approved by the investor. In this model, ISA investors were effectively competing against Federally subsidized student loans offered through the colleges and universities directly. Given the subsidized competition, this was never a fair fight for investors, and offering ISAs as a stand alone financing option doesn’t seem to have gained substantial traction.

Instead, the 3rd party investor model above is being supplanted by a far more exciting model of higher education.

Integrating Education and ISAs

While ISAs haven’t taken off as stand alone financing options, they are being rapidly integrated into educational institutions including colleges, universities, and startups focused on “bootcamps” to train workers in specialized skills in 6-12 months.

More traditional college and universities, starting with Purdue University, Clarkson University, Messiah College, and soon to include the United States Collegiate Athletic Association, are working with startups such as Vemo to provide ISAs to students attending their programs. Unlike the 3rd party investor model, educators and investors are now partners working together to achieve a positive rate of return for their investment. This rate of return is highly dependent on the learning pathway (e.g. college major) a student pursues, and hence their future income. The rate of return is also dependent on the cost of the education itself. ISAs are going to begin to align incentives between students and schools, bringing transparency to student outcomes and educational costs.

For example, using Purdue’s ISA calculator, a student can easily see that a Finance major graduating in 2021 would earn an average of $45,000 upon graduation. On the other hand, a Math Education major would only earn $33,000 at graduation. Similarly, investors at Purdue are willing to invest $12,000 in a Finance major, but only $9,000 in a Math Education major. Obviously, if enrollments in Math Education begin to decline precipitously, Purdue will need to begin to tailor its education model to lower costs for students. Welcome to…

The Dawn of Transparent Education

In the Transparent Education model, student and educator incentives are completely aligned: spend the least amount of time in school, learn the most possible, and get the highest paying job possible after graduation. Transparent Education stands in stark contrast to the Low Visibility Education where a student can obtain a traditional Federal student loan, for the same amount of money, no matter the major, and no matter the expected post-graduation salary. New education startups, such as Lambda School and App Academy, offer the most exciting examples of Transparent Education.

These schools start with modern education distribution technology. Instead of classrooms and tenured professors (old distribution tech), these schools have remote or part-time instructors, online instruction, and digital course material. Furthermore, these schools have “skin in the game” with their students because ISAs are the primary form of tuition. This means that if a student doesn’t finish the program, the educator doesn’t get paid. On the other hand, the more money their graduates make per dollar of training spent, the faster and higher the rate of return for their own investment in their own students.

In addition, ISA and education integration will enable competition between schools to offer students the best financing terms. For example, today, Lambda School only gets paid above a $50,000 threshold. This is their signal to students of their confidence in getting them a job above this salary level. App Academy could compete with Lamda School by offering an ISA with a $75,000 salary threshold, signaling their confidence in superior training quality. Students would then be able to choose the best financing terms available, subject only to their ability to be accepted to these programs.

Mining the Skills Gap

The most exciting aspect of Transparent Education is the potential to enable schools to effectively “mine the Skills Gap”. In other words, if there are lucrative employment opportunities in one region or industry, but few workers with sufficient training to fill these roles, educators could step in to provide training and pursue the economic rewards of minted new graduates. For example, if web designers are in high demand in Nashville, Tennessee, with salaries to match, schools could invest in local students to pursue these job opportunities. Alternatively, if the value of the skills gap was substantial, schools could provide students with larger investments to pay for housing and transportation, effectively eliminating barriers to education for the most talented applicants.

Imagining the Future of Transparent Education

In the future of Transparent Education, imagine that venture capitalists and hedge funds analyze the labor markets to identify lucrative skill gaps, where low cost training can yield substantial student and investor ROI. Funding could be unleashed for new education businesses with ISA tuition models that begin to supply workers to desperate employers. Employers could then become acclimated to hiring these graduates, many without four year college degrees, who nonetheless perform as well (or better) than their traditionally educated coworkers.

As skill gap mining opportunities become more competitive, these same investors might begin to reconsider why two year MBA programs, and four year undergraduate degrees in Finance should have all the fun providing qualified workers to management consulting firms and investment banks. A second “skills rush” could be unleashed to fund schools to massively disrupt existing higher education models. Employers, already embracing “unconventional” graduates from the first “skills rush”, are more than willing to run the experiment again in the hopes of achieving similar results.

The dawn of Transparent Education has just begun, but we imagine that it has a bright future ahead.

Sources:

  1. IncomeShareAgreements.org
  2. The Economist: Income-share agreements are a novel way to pay tuition fees
  3. Purdue – Back a Boiler
  4. Vemo Education
  5. The Atlantic: Code Now, Pay Tuition Later
  6. Lambda School
  7. Senate Committee on Health, Education, Labor and Pensions
  8. The Hamilton Project: A Risk Sharing Project for Student Loans

What is “CTE” and who is Carl D. Perkins?

President Trump signed the fifth re-authorization of the Carl D. Perkins Act into law on July 31st, 2018, enabling over $6 billion in funding for CTE from 2019-2024. (Continue reading and you’ll actually understand this sentence…)

In the World of Work, the acronym CTE stands for “Career and Technical Education”. In broad brush strokes, CTE are classes and training that provide students with specific skills for specific technical jobs. Whether you call it vocational training, vo-tech, or shop class…CTE classes are pursued by over 14 million students in over 1,300 high-schools and 1,700 community colleges every year in the U.S.

In high-school, around 45% of high school students in the U.S. graduate having taken at least one CTE class. Those that take 2 or more CTE classes in high school go on to earn credentials in those subject at higher rates than average high school graduates. Vocational credentials, such as associates degrees or certificates, allow students to access “middle skill” jobs, which require more training than a high-school education (“low skill”) but less than a four-year college education (“high skill”).

This matters because 53% of jobs in the U.S. require the skills provided by vocational education, but only 43% of the workers in the U.S. are trained for these jobs. This is the definition of the term “Skills Gap”, which refers to the chronic mismatch in the U.S. between the low/high abundant skill labor force, and the middle skills jobs waiting to be filled.

Screenshot 2018-08-01 20.56.15
Credit: National Skills Coalition

In addition to preparing workers for employers desperate to hire them, CTE has one further advantage over traditional four year college education: affordability. The average tuition for a technical certificate at a community college was only $3,500 in 2016/2017. In some cases, starting salaries for CTE certificate graduates out-perform those of four-year college graduates.

To summarize: career and technical education (CTE) provides training for students in the jobs where the demand is greatest; training is less expensive than four-year college; filling the Skills Gap in the U.S. is a matter of national economic competitiveness.

As Bi-Partisan as Baseball and Apple Pie

Thankfully, addressing the national Skills Gap is an issue that crosses political boundaries. Support for vocational education has been a staple U.S. politics for nearly 40 years. At the Federal level, the law that has done most of the heavy lifting is the Carl D. Perkins Vocational Education Act of 1984 (called the Perkins Act or Perkins I by policy geeks). Since that time, the Perkins Act has been re-authorized an additional 3 times in 1990, 1998, and 2006. Most recently, President Obama sought its re-authorization in 2017.

On July 31, 2018, the Strengthening Career and Technical Education for the 21st Century Act, re-authorizing the Perkins Act for the 5th time, was passed by both the House and Senate and signed into law by President Trump.

Who the heck was Carl Perkins?

Before we explain what the Perkins Act is and how it works, who the heck was Carl Perkins and why has his name has been enshrined in law for 40 years? His New York Times obituary tells it best:

August 4th, 1984

Representative Carl Dewey Perkins of Kentucky, the driving force behind much of the nation’s social legislation, died early this afternoon in Lexington, Ky., after becoming ill on an airplane trip from Washington.

Mr. Perkins had served in the House since 1949 and was fourth in seniority in the chamber. As chairman of the House Education and Labor Committee since 1967, he had guided and nurtured through Congress such major social legislation as Federal aid to schools, college student assistance, child nutrition, coal mine safety, aid to crippled children and numerous labor measures.

While ascending to one of the highest positions in Congress, Carl Perkins acquired none of the arrogance that often accompanies such a climb. He mixed easily with colleagues in Congress but avoided the Washington cocktail circuit. He went home to his 86-acre farm nearly every weekend to chop wood, tend the livestock, ride his horses and talk to constituents.

Mary Hatwood Futrell, president of the National Education Association, said: ”For over three decades, Representative Perkins stood at the very forefront of the effort to enhance the quality of education in our nation. He was truly Mr. Education.”

The bill that bears his name does so following his untimely death in 1984.

The Perkins Legacy

The Perkins Act, including Perkins V, is fairly straightforward: the Federal Government, via the Department of Education, provides every State with a grant based on population levels. The State then re-grants these funds to high schools and community colleges to provide vocational classes and training. (In our article on the potential merger of the Department of Labor and Education, we noted that the administration of these grants was a core competency of DoE.)

For Perkins V, the funding will begin to flow in July, 2019, when $1.2 billion per year will be granted to the States, increasing slowly to $1.3 billion by 2024. The states are allowed to take up to 5% of these funds to administer the grants, provided they match these dollars with State funds. At the end of the day, roughly $1 billion a year will flow to CTE programs across the country.

Perkins in Action: California

From the 40,000 foot level, the Perkins grants seem like a no-brainer and worth doing. However, when you zoom into the local level, the grants start to feel small and of uncertain value.

Take for example, my State of California, which is the most populous state in the U.S. and therefore receives the largest Perkins grant. California has typically received around $120M per year from the Perkins allocations. By comparison, Wyoming, Washington D.C., Vermont, and other tiny states get only around $5M per year. Of this cash, roughly $50M per year goes to California community colleges and another $60M to California high school districts. (The remaining cash goes to miscellaneous vocational schools and programs.)

This sounds like a good amount of money, however, by comparison, the California Community College system receives over $9.4 billion from State and local governments, and another $5.1 billion from student fees, for a total of $14.5 billion in funding. Factoring in the $50 million Perkins grant, we have a funding stream that amounts to a whopping three tenths of a one percent of the total funding…a “drop in the bucket”.

Momentum

The analysis above isn’t to say that the Perkins grants aren’t valuable or aren’t worth doing. But it does suggest there is a worthy debate to be had about whether the relatively small level of funding is sufficient to move the needle in any substantial way. It also begs the question: what other alternatives exist for $1 billion spent on CTE vs. other jobs related initiatives? We will try and tackle these questions another day. For now, we’ll be happy to see unified, political progress on an important topic.

After all, if we’re trying to get the flywheel of political progress moving, Perkins V does add momentum to the equation in pursuit of a worthy aim.


Pledge to America’s Workers Update

Since our article on July 25th highlighted the Pledge to America’s Workers, many more companies have signed the Pledge to train workers over the next five years, including:

  • United Airlines – 15,875 workers
  • American Trucking Association – 100,000
  • FedEx – 500,000
  • Boeing – 100,000

We are planning to put together a database of these pledges, including an analysis of the number of net new training opportunities and investments they actually represent and will let you know when it’s online. Stay tuned!


 

A Champion for the Human Age of Work

Seventy years ago, it was just two lawyers in Wisconsin helping businesses find temporary typists. Today, it’s a global company with annual revenue of over $20 billion. Meet the Manpower Group.

The Manpower Group is the one of the largest workforce management companies in the world, with nearly 2,700 offices and 29,000 corporate employees in 80 countries. On any given day, hundreds of thousands of Manpower’s temporary workers support hundreds of thousands of clients.

The Human Age

Manpower has developed its own point of view about the global economy. In this view, we have entered the “Human Age” where “human potential is the major agent of economic growth and access to talent has replaced access to capital as the key competitive differentiator for organizations.” Contrast this point of view with the “we will all be replaced by robots” perspective that dominates today’s popular narrative.

Sure, this framing is in Manpower’s self-interest to promote, however several trends seem to favor this point of view. Global demographics are shifting from younger to older populations of workers. Technology changes are requiring the rapid acquisition of new skills. Employers require more and more flexibility, complemented by workers who have more choices about when and how to work. Manpower obviously plans to be at the nexus of the Human Age, and is taking several strategic steps in this direction.

The Human Age in the U.S.

Manpower’s latest strategic step came to our attention as we’ve followed the aftereffects of President Trump’s executive order 13845. As we noted in our recent article, EO 13845 was signed alongside a challenge to American companies to commit to new training and apprenticeship programs called the “Pledge to America’s Workers”. We noted then that “as with so much else this Administration has done, it creates a (potentially) self-fulfilling perception of progress, that despite its illusory beginnings has the potential to yield real-world benefits.”

As we predicted, many companies have since signed the Pledge, including Manpower, which committed to train more than 130,000 American workers over the next five years, making it one of the 10 largest pledges to date. Their commitment will be implemented via Manpower’s MyPath program, an “education as a benefit” program started by the company in 2016 before “education as a benefit” even was a thing.

The Manpower Story

Manpower has been publicly listed on the NYSE since 1967 (with the hilariously politically incorrect ticker symbol: MAN), and was founded in 1948 by attorneys Elmer Winter and Aaron Scheinfeld. The attorneys needed a typist to work on a deadline project but weren’t able to find a anyone to fill their temporary position. Polling other businesses, no one else knew how to solve the problem either, so the founders scratched their own itch and started a temporary help agency.

Manpower grew organically for the first several years, and then in 1954 began to franchise temp agencies as part of their business model. By 1957, the company had expanded to most major U.S. metro areas, as well as opened offices in the United Kingdom and France, which is now Manpower’s largest international market. By the 1960’s Manpower was in South America and Asia, and in the 70’s had over 50% of its revenue coming from international market. Today, their global revenue stands at 87% of total.

The Manpower Group today is considered to be one of the most ethical and admired companies globally. It is composed of 4 business units:

  • Manpower — Provides temporary staffing and permanent recruitment and represents over 60% of its gross profits.
  • Experis — Delivers professional talent specializing in Information Technology (IT), Engineering, and Finance.
  • Right Management — Helps organizations and individuals with skills assessment, development and coaching to increase productivity and optimize business performance.
  • ManpowerGroup Solutions — Is the global leader in outsourcing services for large-scale recruiting.

It’s American Business represents about 12% of global revenues at $2.7 billion, and is Manpower’s second largest global market after France, which is 2x higher at $5.5 billion. Manpower competes in a highly fragmented competitive market composed of a few global peers, such as The Adecco Group and Randstaad, as well as specialized players like Recruit Holdings, and Robert Half.

The Talent Shortage

Given its global reach and status as one of the largest staffing companies, Manpower has a front row seat to the global labor markets. Since 2006, Manpower has been surveying companies in its markets about talent shortages. The 2018 Talent Shortage Survey includes over 39,000 employers in 43 countries, and asked respondents:

  • How much difficulty are you having filling roles compared to last year?
  • Which skills – hard skills and human strengths – are the most difficult to find, and why?
  • What are you doing to solve talent shortages?

The results of the survey are fascinating. First, there is a clearly a global talent shortage, with 45% of employers reporting difficulty filling roles, the highest level since the survey began.

talentshortage1.png

Employers cite a lack of applicants (29%), the “skills gap” (27%) (a lack of hard and soft skill abilities), and inexperience (20%). To put it another way, there are too few applicants, with too few abilities.

The solution employers use to solve this problem are not surprising: providing employees with additional training (54%) and changing their hiring standards to consider a broader range of candidates (36%). However, what is actually very surprising is that “over half are investing in learning platforms and development tools to build their talent pipeline, up from just 20% in 2014”.

To say it a different way: The number of employers offering learning programs and training to employees has more than doubled in the last 4 years. This is the wave of employer interest that companies like Guild Education are riding to grow businesses focused on helping large corporations train their workers.

Manpower’s business units map nicely to the strategies they advocate for solving the talent gap, none of which will surprise anyone in tech. Namely, that companies need to choose a “build, or buy” strategy, where “build” includes investments in worker training, and “buy” is means paying more in salary and benefits to attract the employees with more abilities from the start. The numbers above clearly indicate that most employers are actively choosing a “build” strategy, and this trend only promises to continue as the global labor market tightens.

MyPath

Manpower was an early leader in the “Education as a benefit” model. In 2016, Manpower launched MyPath to provide their employees with free college education opportunities at for-profit colleges, currently in the form of an exclusive partnership with the University of Phoenix. Manpower gets both a tax write-off as well as a more highly trained worker than can be billed out to clients at a higher rate. These two factors are sufficiently rewarding to offer the benefit to over 50,000 people working for Manpower in the U.S. every year.

In addition to its partnership with the University of Phoenix, MyPath seems to also be in the midst of exploring additional skill acquisition tools.  Examples include:

  • Pathways: A tool that offers data on the career pathways available to people in office administration and warehouse work, including the training required to move from one role to the next.
  • powerYou: Free access for Manpower associates to thousands of videos, similar to Lynda.com, that help with knowledge acquisition in topics like business or data analysis.

It’s clear that the University of Phoenix partnership is the cornerstone of MyPath. But, despite the fact that the other efforts feel like they are in “beta mode”, they are all worthy attempts to help workers gain new skills.

The Future of the Human Age

Expect to hear more about Manpower, especially as we delve into more of the reports issued by their Workforce Insights Group. We have an article in the works on “Learning Culture” and its importance relative to innovation, diversity, and many other elements of culture that impact organizations. We’re also going to highlight the ways in which Manpower (and other workforce companies) are helping large organizations map out skills gaps internally, a proxy for innovations to come externally in the broader labor market. Finally, we’ll look more at the data behind the Human Age and show how robots and algorithms are new tools for humans to use, rather than replacements for humans themselves.

Manpower believes in the Human Age, and we do too.