The Most Common Kinds of Human Capital Contract
Human capital contracts are most commonly associated with undergraduate education costs, and this is by far the most common use for these financial instruments. Of course this makes perfect sense given the high cost of an undergraduate education, and the burden that a high student loan debt places on the student post-graduation. The risks and rewards are high for the investors, given that they are often funding a prospective student with little work history and an unknown post-graduate future. If the right students are matched with the right investors, a human capital contract can pay off while the student is happily pursuing a positive career path.
But what are the other types of human capital contract? There are actually several:
1. Human capital contracts for graduate school. These types of financial instrument are most commonly seen in fields where there is almost a guaranteed payoff, or at least a usual path. For example, a student with high achievement as an undergraduate who wants to go to medical school may seem like a low risk – as long as she or he actually finishes medical school, the later income stream from which the investor’s payoff will come is likely to be high.
2. Human capital contracts for re-training or trade school. Sometimes the cost of picking up a trade, such as becoming a plumber or electrician, or the cost of re-training to deepen and expand certain career skills, is high. Usually the costs are not as high as post-graduate education, but still they can be prohibitive or at least challenging. A human capital contract that covers these expenses and then asks for a payoff when the career begins or resumes could be used.
3. A human capital contract could presumably be used by a small business owner who draws a salary and needs money for expansion or even start-up. In this case after the business improves the investors will collect a percentage of the increase that the small business owner can pay him or herself. This less direct type of human capital contract is not usually seen but certainly fits the mold of what these funding instruments are al about.
These are the three most common uses for this type of funding instrument. We will update this page as we discover more ways that investors and people with financial potential are matching their needs.
Who Uses Human Capital Contracts?
Human capital contracts can provide prospective students, whether undergraduate or graduate, with programs that have more flexible terms and even better rates than traditional funding solutions. Most commonly referred to as crowdfunding for education, these instruments are particularly popular with two groups:
– Those who do not qualify for a traditional path or cannot get sufficient value to pay for their schooling. In these cases the human capital contract provides perhaps the only method of going to the school of your choice.
– Those with superior academic or occupational achievement thus far who investors want to back. Unlike traditional funding based on purely financial factors, human capital contracts are more specifically counting on your potential.
If you fall into either of these groups, or you just don’t like the rate and/or terms you are being offered by a traditional lender, you may want to look into human capital contracts. And investors who want to diversify your portfolio by choosing a promising student who appears quite likely to pay everything back, you may find a return that is equal to or better than what you are getting elsewhere.
Human capital contracts are not well known especially compared to other types of crowdfunding and peer to peer lending you find here and elsewhere, but it may grow as more students and investors find new success with this method..
We predict that human capital contracts will really take off in popularity and use. Since the funders of the human capital contracts can pick and choose among promising students, and they can also choose those likely to pursue a fruitful path, this will be like traditional lenders being able to more carefully choose who they let borrow. We think defaults will therefore be low and the benefits will be strong on both sides.