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Innovation Blog

Innovative Way to Pay for College: Human Capital Contracts

By Shlomo Maital




Student in Debtors’ Prison: Let Them Out!


Growing numbers of Americans are either giving up dreams of college, or finding themselves drowning in massive debts through student loans, as the U.S. economy continues to struggle.  Meanwhile, Britain’s austerity program includes tuition hikes, causing major unrest among students and concern among those who aspire to become students.  [In continental Europe, tuition is free, in Belgium, Holland, France, and Germany, though some fees are charged, especially for business students.]

    America’s student loan program is bankrupt.  The Student Loan Administration (“Sallie Mae”) has doggedly and fiercely pursued students, to repay their loans, whatever their reasons and circumstances.  Unlike mortgages, where home-owners can default, there is no defaulting on a student loan, even for students who are working for low pay in a developing country. 

    Is there a solution? With America’s budget deficit of 9 per cent of GDP, in the near future there is no possibility the government will come to the aid of young people wanting to go to college but unable to, and deterred by the debts it might entail.  The irony is, it has been proven beyond doubt that no public investment pays anything close to the high return paid by human capital investment, and MIT Nobel Laureate Bob Solow proved nations grow wealthy by investing in human capital, not physical capital.

     Here is a new idea proposed by New York Times blogger (“Opinionator”)  David Bornstein, called a Human Capital Contract (HCC):

If you were a student looking for financing to pursue a degree in social science, would you accept an offer of $16,000, in exchange for paying 4.5 percent of your income for 10 years after you graduate? … I wrote about a social enterprise called Lumni, which helps predominately low-income students in Colombia, Mexico, Chile and the United States finance their college educations through “human capital contracts.” In exchange for the financing they receive, the students commit to repayment schemes along the lines of the one outlined above (the terms vary). After the time period elapses — it’s always 10 years or less — the obligation expires, no matter how much has been repaid.  

  Reader reaction was sometimes fiercely opposed.   After all, it sounds a bit like slavery, some readers said.  The real test should be in the marketplace.  Offer it to potential students, ensure they understand the terms – and see their reaction.  After all, an HC contract does not impose a large absolute debt burden, but only a bearable proportional one, in proportion to income.  For students who choose low-income jobs (such as teaching), the repayment burden remains bearable.  For students who get high-paying jobs in finance or consulting, they return proportionally more, but retain 95 per cent of the benefits their education made possible.  It’s a fair deal.  If you graduate and are unemployed, and thus have zero income, you pay nothing.  An HC contract is similar to a reverse mortgage.  Take the money now, live in your house, when you die the lender gets it.  Only: take the money now, use it to build human capital, and pay back part, a small part, of your gains, to the lender. 

  It’s time to think creatively about how to avoid losing a generation of college students to the American economic downturn.  An HC contract is worth careful thought.



Blog entries written by Prof. Shlomo Maital

Shlomo Maital
June 2011
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