OUR OPINION: Investing in students' futures

It's not like taking out a loan. It's more like selling stock in yourself.

And in a country that's searching for new ways for students to pay for college, these "human capital contracts" deserve a second and third look.

The high cost of college has been an issue for years; more recently, talk has turned to the staggering student-loan debts many young people are taking on. President Barack Obama also is addressing the issue, putting colleges on notice: "If you can't stop tuition from going up, the funding you get from taxpayers will go down," he said in his State of the Union address.

Human capital contracts take a different approach. A New York Times writer last year described it this way: "If you were a student looking for financing to pursue a degree in social science, would you accept an offer of $16,000, in exchange for paying 4.5 percent of your income for 10 years after you graduate?"

Note the particulars: The student gets tuition money in return for a percentage of his or her income over a set time. Then when that time is up, the student's obligation is ended, whether he or she wound up working as a Peace Corps volunteer (and so perhaps did not pay back the full amount) or an investment banker (and paid two or three times the original sum).

That's the contract's basic outline. It differs from conventional student loans in key ways:

First, students borrowing money conventionally also take on virtually all of the risk. Student loans are almost impossible to get rid of even in bankruptcy, and many thousands of students have found out.

But in human capital contracts, the student and the lender -- really, the investor -- share the risk. And even that doesn't do justice to the dynamic:

"What we like about this approach is that companies who invest in human capital will take steps to protect their investments, and that will be good for everyone," writes Kimberly McCaffery at the website Frugaltopia.com.

"A 'pay-when-you-get-a-job' and a 'pay-more-if-you-get-a-better-job' student loan system will incentivize lenders to work with lawmakers, educators and future employers to make sure every graduate gets a great education and a good job.

"Shifting the lender's focus away from locking borrowers into outsized lifelong debt and toward strategies to realize greater returns on 'human capital' investments by making sure graduates get jobs will bring immediate and lasting change for the better."

And just as students may benefit from the new arrangement, so too may the lenders/investors. They can do well by doing good, performing a real public service while earning steady returns.

That's been the experience of Lumni, a "social enterprise" that has made such deals "with 1,900 students to date," most of them overseas, The New York Times reported last year.

"So far, the default rate is under 3 percent."

Regulatory obstacles have kept Lumni from investing in students in most American states. But California now is an exception; one Lumni student there is Krystal Shipley, who's studying at the University of Redlands.

Shipley got $4,000 from Lumni, and in return, she pledged 1.7 percent of her income for 10 years. "Like many sophomores, she is undecided about her major and has little sense of her earning potential," the Times reported.

But "whatever happens, Lumni's payments won't be oppressive" -- and that's the real and very exciting point.

-- Tom Dennis for the Herald