A Venture Capital Alternative to Federal Student Loans

[Herman Munster]

http://www.usnews.com/usnews/biztech/capitalcommerce/061206/a_venture_capital_alternative.htm

The Nobel Prize-winning economist was in favor of "human capital contracts." As described to me by Prof. Gary Wolfram, a political economist at Hillsdale College in Hillsdale, Mich., a student in need of college financial aid would go to a venture capital market and obtain investors in his education. In return for that equitylike financing, the student would pledge a specific percentage of his future income–as opposed to a loan's fixed interest rate–over a specified period of time to be paid to the investor. Wolfram knows what this sounds like.

"It sounds like some sort of indentured servitude," he says, laughing.

But how is this different, in that respect, from taking out a federal student loan and having to pay back Uncle Sam? Eventually, human capital contracts could be combined into investment pools so the default risk could be spread over a large number of students. And as Wolfram explains in a study, "As the market for these contracts developed further, shares in the funds would be traded in the same way that individuals purchase shares in such things as real estate investment trusts. This would create an economically efficient way to finance higher education that would allow students to graduate without having to fear that their future earnings would not be sufficient to pay their student loans."

[philosophie_en_rose]

1. sounds like? this IS indentured servitude.

:scared:

[SharonAnn]

2. It IS indentured servitude. That why it sounds like it is.

[Herman Munster]

3. but you would be able to default on these contracts

unlike federal student loans which you can't get rid of even during bankruptcy. So let's say the contract is 5% of your net income for 20 years.

If you choose to not work for 10 of those years, you may not pay off the face value of the contract and there's nothing the investor can do about it. The investor would be taking a risk that you would default like any other investment.

[Kiouni]

4. thats alot more money

then just paying the loans don't you think? 5%! and it only goes up so they make out like bandits.

[Herman Munster]

5. not really

Let's say that you take out a student loan for $150,000 to go to college or law school. And then you go to public service law and you start out making $35,000 a year.

5% of $35,000 is only $1,750 a year If the investor bet that you would go the corporate law route and make six figures and give him a great return on his investment, they would be mistaken.

I'm just using 5% as an example. It can be 2% or any percentage. But in certain circumstances, I can see something like this being benefical to the student.

[papau]

6. last default case on Ind servitude helped lead to a legalization of slavery in

the colonies. Slavery was a punishment for an indentured servant running away. Then not being able to pay the debt - in the 1655 case of John Casor, indentured servant to a black man named Anthony Johnson - was ruled by the Court in favor of Mr Johnson, making non payment of debt reason for making a man a slave.

http://www.pbs.org/wgbh/aia/part1/1narr3.html


One of the few recorded histories of an African in America that we can glean from early court records is that of "Antonio the negro," as he was named in the 1625 Virginia census. He was brought to the colony in 1621. At this time, English and Colonial law did not define racial slavery; the census calls him not a slave but a "servant." Later, Antonio changed his name to Anthony Johnson, married an African American servant named Mary, and they had four children. Mary and Anthony also became free, and he soon owned land and cattle and even indentured servants of his own. By 1650, Anthony was still one of only 400 Africans in the colony among nearly 19,000 settlers. In Johnson's own county, at least 20 African men and women were free, and 13 owned their own homes.

In 1640, the year Johnson purchased his first property, three servants fled a Virginia plantation. Caught and returned to their owner, two had their servitude extended four years. However, the third, a black man named John Punch, was sentenced to "serve his said master or his assigns for the time of his natural life." He was made a slave.
===================================================
In 1655 an indentured servant named John Casor, whom the court had earlier treated as an indentured servant. went to court to keep his master from extending his indenture and making him a slave for life. Casor was an African who had been brought to Virginia sometime during the 1640s. His master was Anthony Johnson. The court ruled in favor of Anthony Johnson and thus consigned Casor to a lifetime of bondage.

[Hosnon]

8. THAT's the benefit. Being able to wipe that debt out in the worst of

circumstances would save so many people.

[Cleita]

7. What a cynical way for a money guy to try to make money

off the future of college students.

I have a better way. Free tuition to deserving students regardless of their families' financial circumstances.

Whom do we tax? The capitalists, of course. Business benefits from educated and trained young people. It's time to make them pay for it not the student and his family.

[newsdude]

9. Hillsdale College

Is one of the most right-wing "CATO institute-style" colleges in America.

[high density]

10. Umm no thanks

I'd rather pay 5.75% interest on a loan for a few years, kthx. Even if it's to the evil Sallie Mae.

[applegrove]

11. The market does not offer loans to people who don't have enough equity. If the private

market was in to this..they would have already started making the loans..which they haven't. Because it won't work.

[sweetheart]

12. privatizers at work

I'm suprised that instead of shreaking 'PRIVATIZATION', people are considering this stupid proposal.

The problem is not for the best students who would likely get funding, and even be able to pay back,
but rather for students with less interest; those students will get higher interest rates, and get
bumped to a pool-B of lending where risks are higher, and a pool-C that would in automobile insurance
be classified as 'assigned risk'.

Its that 'assigned risk' category that, like with pre-existing conditions for medical insurance, and
car insurance for young persons with too many tickets, where the market fails, and without a public
lender (which is what sally mae) was created for to start with, the public will need to enforce the
right of all citizens to equitable treatment in education financing... and this will involve assinging
the worst risks across the lenders. They will of course, fight this, and the real result will be
like we see in healthcare, 40 million uninsured, then 4 million students will be deemed too high
a risk to finance, and the lenders will fight tooth and nail to block their educational possibilities
in the name of profits.

[sweetheart]

13. Funnily, the simplest solution

is for the public to pay direct to each university directly a per-head stipend,
and ressurect the intelligent simplicity of public support for higher ed...

..but why do something simple, when the finance profession can squeeze thousands
of jobs and profits out of the interest contracts, like the tax industry, a whole
business of make-work that does not contribute anything to the economy at all.

[leftofthedial]

14. fucking capitalists

need to be neutered