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equity, human capital and the financing of education

On a recent commute, I wondered about higher education and its high cost. My train of thought raised many questions -- many of which seem to have socially acceptable and/or politically correct answers, enjoying the sanction of our most sagely elites. As usual, this heightened my desire to find clear, cogent and reasonable positions to inform my opinion.

First off, here are my questions:
  1. Is society obliged to finance the educational interests and pursuits of its members? In other words, is every member of society "entitled" to an education? Is it a right -- fundamental or otherwise -- in any sense of that word? If yes, why? Also, if yes, then which fields of education ought to be funded and to what degree? In other words, should there be a correlation between public funding of education (in the form of loans, scholarships, etc.) and the value, to society, of the subjects of study?
  2. Should credit-worthiness (i.e. future earning potential) be taken into account for the awarding of student loans? Is crippling student debt unethical and immoral? Do not the legions of Art History or Anthropology majors, saddled with debt in the tens of thousands, and toiling the weekend shift at Starbucks, make a strong case for the immorality and injustice of the loan that made their "choice" (so-called) possible in the first place?
  3. Whatever happened to the notion of the financing of arts and humanities by patronage? Where did the idea of publicly-funded arts and humanities arise? And even if such a notion ought to be entertained, how does society choose which subjects of study in the arts and humanities are worthy of its dime? Should it choose? Shouldn't it choose? Can it afford not to?
  4. Has the easy availability of publicly-funded (or, at least, publicly subsidized) loans distorted the education market -- leading to ever-increasing prices? Have they created secondary distortions and inefficiencies in the healthcare market via medical student loan inflation? Can a correction in one lead to a correction in the other -- in other words, could healthcare reform arise from market-based education reform?
  5. Most importantly, why is debt (public or otherwise) the main instrument of securing financing for education? Why isn't there a notion of equity-based financing for education? In other words, investment in an equity stake in the future earnings of a current student? Doesn't everybody -- the investor, the student and society-at-large -- win?
While I may someday care to find answers to all my questions above, at present, I concerned myself primarily with last one -- the idea of equity-based financing for education.

It turned out that this was not a new idea at all (they rarely are, for "there is nothing new under the sun"!). Milton Friedman, I was overjoyed to discover, had proposed this very idea in the 1950s. He called it "Human Capital Contracts". (A good primer is here). In fact, it turns out, the idea originates earlier still -- in Adam Smith great work, The Wealth of Nations! Surprisingly, yet again, pleasantly surprised!

In the breathtaking manner of our brave new economy of ideas, these ideas have already resulted in actual enterprises -- Lumni, pioneering the way in human capital financing for education and Upstart, which facilitates direct investment in any person (namely, in a share of their future income for a set period of time).

A sample personal income equity contract may be found here :

Below, I have copied verbatim, for the interested reader, certain parts of articles that address this subject, followed by a list of references for further reading.

Verbatim excerpts
  • """Why can't I invest in 20% of the future earnings of a first-year Harvard Law student? After all, that student is likely to be in debt up to their eyeballs, perhaps working part-time negatively impacting their education and ultimately decreasing the value of their three years of learning consumption. And even once they have graduated, they may have years of hundred-hour weeks before that debt is cleared. By the time they are 30, they have worked tirelessly for a decade and still yet to have a real dime to show for it. But they also have tremendous future earnings potential. This Harvard Law 1L is obviously smart as a whip and of suitable competence to handle the adult decision of sacrificing lifetime earnings for the prospect of a better decade in their youth: and it is probably a decent bet for an investor to make if they can wrangle a suitable valuation and have a palate for highly illiquid, long-term investments. If banks can rake in earnings on the interest imposed on the $1 Trillion-with-a-T student loan market, why can't I, the individual investor? Now what about the high school junior from Hunts Point that works two jobs to help pay rent that just got an 800 on her Math SAT? Does she deserve a chance at selling equity in herself? Would somebody find enough value to justify the risk on the other end?""" (from
  • """Is it possible to finance higher education the way we finance start-up companies? That’s the approach taken by a social enterprise called Lumni that has raised $17 million to finance the education of a wide array of students in Chile, Colombia, Mexico and the United States. Lumni offers “human capital contracts” to people like Jairo Sneider, who grew up in a low-income, single parent family in Colombia. Sneider’s dream was to attend college so he could become a nurse and serve his community. To do so, he needed $8,500 — a sum that is close to the average annual income in Colombia. The problem is that financial aid and student loans are far less abundant in Colombia than they are in the United States. Sneider, who was unable to provide collateral or a cosigner, had little hope of getting a loan from a traditional lender. Here’s the deal that Lumni struck with him: In exchange for $8,530 in financing, Sneider agreed to repay 14 percent of his salary for 118 months after he graduated. At that point, regardless of how much he has paid, his obligation terminates. Although this might sound similar to a loan, an “income contingent” repayment plan like this is far less risky for a low-income student like Sneider. If he has trouble finding a job or switches careers and earns a lower salary than expected — very distinct possibilities — his payments will drop automatically. The terms are, in fact, determined based on his expected earnings. If he ends up earning the average salary for nurses in Colombia, he will end up paying the equivalent of an interest rate of 17 percent, which is the average rate in the country for a student loan. And if he ends up doing better, he will pay more, and Lumni will share in his success."""  (from
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