It's no secret that paying for college has become more of a struggle recently. Parents aren't able to contribute as much, loan companies are reducing their support, and jobs are becoming more scarce.
Interestingly, these tough times force people to become more creative in the way they attempt to finance their schooling, or pay for things in general. More and more, I'm hearing people talk about "human capital contracts." And, while the phrase doesn't exactly make me feel warm and fuzzy, it's definitely an idea worth discussing.
A human capital contract is an agreement entered into by an investor and college student. The investor pays college expenses, as an investment, in return for a percentage of the college student's future earnings over a fixed amount of time.
The benefits:
-Financial risk is transferred from the student to the investor
- The student avoids student-loan debt that can delay many life events like marriage, buying a home.
-The payment percentage is directly proportional to the amount the student makes in his or her job. (A teacher, for instance would have smaller payments while a lawyer or doctor would have higher payments.)
The downfalls:
-The contracts create an incentive for students to hide their income. (Remember, payments are based on earnings: the more you make, the more you pay.)
-No fixed payment is required. Therefore, a student could play Wii all day and not pay anything.
-"Adverse Selection": this system seems to penalize students that plan on entering into high paying careers.
Plans like these are taking root in other countries, including Germany. Is it a viable option for students in the United States? Maybe.
For more information about human capital contracts, read this report by the Grand Forks Herald.
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