How Investors Are Turning Cash-Strapped College Students into ‘Human Capital’

Credit: http://www.flickr.com/photos/elycefeliz/

Have you heard the one about the dance/film/theater/Russian neo-realism literature major whose parents refused to contribute to her college education unless she chose a more practical area of study? It’s a story so common it’s become a cliche, almost as well-known as the cautionary tale of the starving artist. Higher education today is so expensive it far exceeds what many American families can afford, forcing students to take out loans they’ll potentially be paying off for decades. When well-intentioned parents balk at their kids getting “impractical” degrees, it’s mostly out of fear their children will face poverty-stricken, debt-laden futures that aren’t worth the savings-sapping investment. Even if mom and dad aren’t exactly right, their hearts are in the right place.

Now imagine the same scenario, in which the artsy student still needs money for tuition, but replace the concerned parents—and the loan agencies—with a business-minded private investor. This deep-pocketed funder offers what seems like a deal far better than your average lender: thousands in tuition dollars to be repaid, interest free, with a contractually designated percentage of her future salary. Of course, like any savvy financier, the investor will want to make a profit, and will be well aware that the earning potential of an arts major pales in comparison to an engineering major—one who, in this case, also needs tuition aid. Having assessed all risk factors, the funder may choose to fund one or both, but of paramount importance in the decision is the earnings potential of the students’ study areas. Whereas parents worry about their kids’ majors because they want what’s best for them, investors care because they want what’s best for the bottom line.

Income-sharing agreements (ISAs) may be the future of student lending, but they’re rooted in ideas that date back more than half a century. In 1955, economist and father of libertarianism Milton Friedman proposed that investors might “‘buy’ a share in an individual’s earning prospects,” underwriting schooling and training “on [the] condition that he agree to pay the lender a specified fraction of his future earnings.” With that founding principle, ISAs turn students into assets deemed high- or low-yield based on estimated career profitability and the graduating college’s track record in producing high earners. That means a Dartmouth business school senior is likely to get investors salivating in a way a puppetry major from the University of Connecticut would not.

Read more: How Investors Are Turning Cash-Strapped College Students into ‘Human Capital’