Three students of the online bootcamp Lambda School are alleging that the for-profit school misrepresented the program's job placement rates, financial arrangements, and registration status.

“When you put all those pieces together, yes it’s predatory,” Alex Elson of the National Student Legal Defense Network, which is representing the students, told Yahoo Finance. “When you have lies about the success, $30,000 of tuition, and you have fundamental misrepresentation about the alignment of incentives, students are gonna get duped.”

The former students are asking for a cancellation of their Income Share Agreements (ISAs), which involve Lambda providing loans to cover the cost of attendance in exchange for students paying 17% of their post-graduation salary (if their job pays at least $50,000) to the company for 24 months, as well as a refund of payments and for damages.

Lambda School provided Yahoo Finance with the following statement: "Per policy, we don’t speak about individual student or alumni situations in detail publicly, but we’re of course happy to review matters directly and will review any cases that are filed. In general, though, for any student’s ISA payments to be activated, they would have first signed an ISA contract and subsequently landed a role leveraging skills learned at Lambda School that pays $50K or more in salary."

Since Lambda's contracts precluded the possibility of a class action lawsuit because they had arbitration clauses and class action waivers, the three students filed their testimonies to be arbitrated by the American Arbitration Association.

Previous trouble with regulators

Lambda is a San Francisco-based for-profit online coding school that offers six- and 12-month long computer science courses.

Programs cost $30,000 and promise that students who graduate will not have to pay it back until they find a job that lets them earn more than $50,000 or more annually.

The bootcamp has attracted significant interest from students and companies — including Amazon (AMZN) — while also coming under scrutiny from regulators.

Last month, the California Department of Financial Protection and Innovation (DFPI) reached a settlement with the bootcamp over its usage of potentially misleading marketing. Specifically, the DFPI found issues with a public blog post by Lambda that gave the impression that the students' ISA contracts were not dischargeable in bankruptcy. (Lambda address the DFPI situation in a blog post.)

The private company, led by founder and CEO Austen Allred, also ran into trouble with the California Bureau for Private Postsecondary Education in 2019 and was ordered to cease all operations for not registering as a post-secondary educational institution. Lambda appealed, but Lambda's ISAs are still not approved by regulators. The filing also stated that Lambda's registration is still pending.

'The most critical component of Lambda’s operations'

The arbitration case from the three former students accuses the company of:

• "falsifying and misrepresenting its job placement rates,"

• "misrepresenting and concealing the true nature of its financial interest in students’ success, including by falsely representing that Lambda only got paid after students found employment and got paid,"

• "misrepresenting and concealing from students that the state of California ordered Lambda to cease operations, stop enrolling students, cease all instructional services, and submit a closure plan,"

• and "enrolling and providing educational services to students [which is] in violation of that order."

In October 2019, Allred wrote an article in Harvard Business Review asserting that on average "more than 85% of our graduates land a job paying $50K or more within six months of graduation."

However, the Lambda School Outcomes Report of the first half of 2019 reported a lower job placement rate: "Of the 284 full-time students who graduated in H1 2019, the job placement rate was 71%."

Student Defense, in its press release, stated that "internal documents reveal school executives told investors only about half of students were employed in relevant jobs within six months of graduation."

The arbitration filing asserted that job placement "is the most critical component of Lambda’s operations; to a prospective student, no information is more important than the school’s record of successfully placing students in computer technology careers."

One of the former students, Heather Nye, was working as a bartender and paying off her student loans when she became impressed with Lambda's high job placement rates and the zero-dollar upfront cost.

The former aviation electrician in the U.S. Navy signed an ISA contract and enrolled in Lambda's web development program in June 2019. She withdrew in March 2021.

"Had Lambda truthfully represented its job placement rates, Ms. Nye would have investigated options for pursuing a web development education at another school, rather than signing an ISA that indebted her to up to $30,000 of tuition at Lambda," her arbitration filing stated.

The other two students asserted similar allegations related to appealing prospects, ISA contracts, and ultimately feeling defrauded.

"They are brought into the Lambda orbit by really those fundamental promises: History of success with the job placement rate, won't have to pay unless and until you get a job, and — this also part of our suit — the claim that Lambda's incentives are exactly aligned with theirs because Lambda will not get paid until the students get paid," Elson said. "Which really for the students we've spoken with was a signal of trust."

The lawyer representing the former students added that since ISAs are securitized and then sold to investors, it's not quite accurate to say that Lambda is not being paid until students earn an income over the $50,000 threshold.

"The tuition is $30,000 for a six-to-12 month program," Elson said. "If the Lambda was advertising 30 grand for a six-month program to someone who was low-income, trying to teach themselves to code... $30,000 [up front] is just going to be a non-starter. ... But $30,000 later — and 'free now' — that's enticing."

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Aarthi is a reporter for Yahoo Finance covering student debt and higher education. If you are on an income share agreement for your bachelor’s or master’s degree and would like to talk about your experience, reach out to her at [email protected].

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