Basically, instead of selling debt (with student loans), some college students are financing college by selling stakes of their future income. Obviously, there is more risk for the investor, but also some upside if the student’s income is more than expected. Not surprisingly, what percentage of income over what length of time varies by major.
Fascinating idea. (I wonder if this could even be securitized if the market gets big enough!)
Thanks for sharing.
Someone else is paying and the student has to pay them back. How is that not considered a type of student loan?
Its more like a non-recourse loan with some type of equity kicker. With a non-recourse loan (say one secured by real property), the borrower’s liability is limited to the value of the real property. If the borrower defaults, the lender can foreclose on the property and sell it. If the sale only nets 75% of the outstanding loan, the lender has no recourse against the borrower for any deficiency. If its a recourse loan, the borrower is still on the hook for the 25% remaining balance.
Here the real estate is the given percentage of your earnings over the specified period. Whatever that realizes for the investor/lender is all the investor/lender receives. There is no right to go after the borrower for any additional amount. So in that sense, its non-recourse as against the income streams outside that given percentage/period. There is an equity quicker in the sense that if the borrower makes more during the specified period than is needed to repay the loan in full, the lender gets additional money…
With a traditional student loan, you would still owe if the percentage/period did not cover the full amount of the loan (plus interest). But if you made more than expected, you would not owe any more than the outstanding balance of the loan (plus interest).
Some PGA tour players do this to get started. essentially an angel investor finances them and takes a percentage of winnings.
There was “My Rich Uncle” which was loosely based on this – it seems to have disappeared so I think it didn’t work very well for the investors. What happens when the student doesn’t finish college or can’t get anything but a minimum wage job, part-time?
My son’s existing student loans allow him to select payback amount based on income - they are the regular federal unsubsidized stanford federal loans that everyone has access to receive.
Didn’t Harvard try this about 20 or 25 years ago where students agreed to pay a certain percentage of their income for life ?
Sounds a little like indentured servitude. I will pay for your ticket to the new world and you have to work for me when you get there.
@gpo613: Not indentured servitude because one can select employer, be self employed, unemployed or change employers.
Although also an incorrect application of the concept of “indentured servitude”, newly minted lawyers who have to work for 5 or 6 years in biglaw to repay almost $300,000 of student loans is a bit closer because one “cannot” leave biglaw for other types of law firms otherwise loans may go unpaid and could put one’s bar membership at risk.
I don’t know what I think about this. I am leery of Wall St getting involved in the career decisions these students make. If one wants Job A but Job B pays more, will the company insist on Job B? What happens down the line? No kids until you earn X? No sabbatical? No going back to school even with a full stipend and free tuition because you aren’t earning as much?
Where does this go and where does it end?
If Wall Street has to get involved in financing college costs, then it is time for change.
I think there are some positives to it. First, it’s not a loan so there is no interest accruing.Second, it gives a student an opportunity to have their education financed without a consigner. The two involved in the risk are the student and the investor not the tax payer in the case of loan forgiveness or default. Finally, the only way for the student to pay a premium is to be successful. Unlike loans where you pay a premium if you’re not successful and have defer paying the loan off and the interest continues to accrue.
This is old idea. The classical name is indentured servant. The contract they signed was the “indenture”.
I like this idea for higher paying jobs like engineering. The kids usually are getting good paying jobs so it’s realistic they “can” pay back the loans and maybe at an accerated rate. So the low income kid that gets a good paying job kinda idea.
I don’t know–some of the fortunate engineering students who graduated with S were able to get jobs that paid $60,000 or more/year. I’m not sure how much of that the student could live on and also pay off huge amounts of loans. I think this is another way for students to pay for things that are much more expensive than their resources would allow and now have such students really carefully consider the more affordable options.
You can’t pay back the “loan” at an “accelerated rate”. That’s kind of the point - you are locked into paying a percentage of your salary for a period of time. Using the Purdue MechE salary figures, you’re effectively paying over 10% interest with no opportunity to pay early, refinance, etc.
"I think this is another way for students to pay for things that are much more expensive than their resources would allow and now have such students really carefully consider the more affordable options. "
Just like a loan (ignoring the interest rate difference). There’s a difference between credit card debt for the new iPhone and an investment in the future. Few people wait to buy a house until they can pay cash. Education is one of the few other things worth taking on debt for, IMHO. There’s a real, significant difference in career earnings between HS and college graduates.
@RichInPitt true, but students shouldn’t take on debt they can’t handle. I’ve seen people who have to put off the dream of buying a house or taking a fun but low paying job because they had to go to the very expensive dream college…
And people are both remarkably innumerate and consistently pick and choose the data they want to pay attention to.
A surgical nurse with 20 years of experience at a large hospital in a big city who works extra shifts and overtime can make $120K. You’d be surprised at the number of recently graduated nurses I know who are shocked to learn that entry level does not pay that. A teacher with ESL certification and/or special ed certification who is willing to work in the school that nobody else wants to work in can make $80K in some places. That doesn’t mean that your kid with 3 years experience teaching second grade is going to make that. Yes, a finance degree which gets you a job at Credit Suisse might have you earning 125K, all in, in your first year after bonus. But there are plenty of new grads with finance degrees earning 38K as a budget analyst at your state capital, or earning 45K in the small business division of a regional bank, or 50K in the rotational program at an insurance company.
But people see the high water mark in various salary surveys and assume “I can pay back those loans no sweat!”.