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InsiderOnline Blog: December 2008

Innovation in Higher Education Financing

An alternative to government-subsidized student loans may be coming soon to the United States. Rebecca Tuhus-Dubrow reports for the Dallas Morning News that the company Lumni plans to begin selling human capital contracts very soon. In a human capital contract, investors finance a student’s education in exchange for a percentage of the student’s future income for a period of time—in essence a bond backed by the performance of the student. Loans place all of the risk of getting a college degree on the student: If the student flunks out or the market for his chosen profession falls, the student is still obligated to repay the loan. Shifting from debt to equity shifts some of that risk to investors. Investors might lose if the student’s future income is lower than expected, but they also might earn more than they would under a traditional loan agreement. Such contracts are already being used throughout Europe and in several Latin American countries.

It seems likely, in the long run at least, that bringing professional investors into higher education financing can only induce a better system of accountability for institutions of higher education. Since investors care about long-run returns, they will want to know a lot more about how much particular institutions will increase the earning potential of the students they invest in. That scrutiny is likely to be better than those of students left to their own devices, many of whom may be focused only on where the next party is.

Via Daily Policy Digest

Posted on 12/18/08 03:11 PM by Alex Adrianson

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