Human Capital Contracts: A New Innovation in College Financing
Instead of student loans look into these deals
Human capital contracts are an innovative financial instrument for financing higher education. They can potentially replace or reduce college loan amounts for promising students. With costs of higher education skyrocketing, many prospective students are being priced out of the top schools. Even if they do attend they will carry a mountain of student loan debt. Human Capital Contracts seek to solve these problems.
Boiled down, Human Capital Contracts involve students entering into a contract with a source of funding. This funding source is usually a foundation or corporation, though sometimes it could be a wealthy individual. Consequently, the student agrees to pay a fixed percentage of their income after graduation for a set time. Traditional loans that must be repaid beginning six months after graduation. Often the payments are fixed and start at a high level right away. Human capital contracts, on the other hand, grow with you, becoming a fixed percentage of your income. Thus you always have a high percentage of your income to keep, no matter what you make.
Human Capital Contracts Math
|80K 5% interestStudent Loan Option:||Student Loan payments||You have left|
|Year 1 salary 34,000||$10,176||$23,824|
|Year 2 salary 38,000||$10,176||$27,824|
|Year 3 salary 40,000||$10,176||$29.824|
|Year 4 salary 42,000||$10,176|
|Year 5 salary 42,000||$10,176||$31,824|
|Year 6 salary 42,000||$10,176||$31,824|
Human Capital Contracts:
|80K 10% x 20 years option||Human Capital Payments||You have left|
|Year 1 salary 34,000||$3.400||$30,600|
|Year 2 salary 38,000||$3.600||$34,400|
|Year 3 salary 40,000||$4,000||$36,000|
|Year 4 salary 42,000||$4,200|
|Year 5 salary 42,000||$4,200||$37,800|
|Year 6 salary 42,000||$4,200||$37,800|
It is actually likely that you will pay a relatively equal amount on a human capital contract than you would have with student loans. If you do end up paying more it is likely because you were successful more quickly than is usual, a good thing all around! But with a human capital contract you are paying a percentage of your income. This makes financing everything else in life much more comfortable.
Human Capital Contracts Risk
Human Capital Contracts are not without risk. The student risks having to pay back more than might otherwise have had to pay on traditional loans. The investor in Human Capital Contracts faces the risk that the percentage of the student’s income that they will collect will fall short of what they would have gained through a more traditional investment vehicle.
The best evidence for the potential of Human Capital Contracts is a government backed system in Australia, where students repay the costs of attending college through forfeiting a percentage of their after college income. Instead of a fixed time period, the students continue paying until their entire debt with reasonable interest is repaid.
Human Capital Contracts Market
As the costs of college tuition rise beyond what a family can reasonably save, and prospective college and graduate school students increasingly must decide whether to take on a mountain of student loan debt, it is possible that we may see an explosion in Human Capital Contracts and other nontraditional funding vehicles.