NCPA - National Center for Policy Analysis

Human Capital Contracts: Private Financing for College

January 23, 2003

With the cost of higher education increasing every year, more students are looking for financial aid. Education experts suggest an alternative to traditional student loans: private financing of higher education through contractual agreements between students and lenders who would invest in them by receiving a portion of their future income for a fixed period.

Called human capital contracts, analysts say such aid has "the potential to increase the amount of funding available for students and reduce the cost of education financing."

Human capital contracts are convenient for students and investors because:

  • They relieve the student from any uncertainty about being able to make fixed loan payments.
  • They virtually eliminate default due to financial distress.
  • They require lower payments for those who pursue careers that pay less during the repayment period.

However, policymakers must take certain steps to make human capital contracts a viable alternative to traditional student loans:

  • Investors should receive protection similar to that given student loan lenders today -- such as recognition of the validity of the loan contract and denying students the right to renege on their obligation if they file for bankruptcy.
  • Contracts should be acknowledged as securities so that investment funds can hold them.
  • Taxation of these instruments should be similar to the treatment given other student financing so they can compete on an even plane with student loans.

Once these concerns are met, human capital contracts, analysts say students will benefit through better financing conditions, lower overall costs and increased competition for student loans.

Source: Miguel Palcios, "Private Financing of Higher Education Alternative Choice to Student Loans," Policy Analysis Number 462, December 16, 2003, Cato Institute.

For text

http://www.cato.org/pubs/pas/pa-462es.html

 

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