Human Capital Contracts could become the new alternative to current public and private debt in America. While revolutionary as a concept, it is one that must be taken into consideration as a unique and efficient way to solve the growing student debt bubble.
A capital contract, in short, is modern indentured servitude. This, of course, is a very distorted parallel but is an effective metaphor. The concept is that you pay nothing upfront with no risk and instead you pay the investor (the government or a private investor) a set percentage of your future income for a set number of years (10 percent for 10 years, 5 percent for 20 years, 2 percent for 5 years, etc.).
This concept isn’t new in the world of business. Just look at Kickstarter, the hugely popular crowd funding platform that is taking the world of capital investment by storm. Similar to a Human Capital Contract, the investors pay an inventor or entrepreneur up front in order to land either a pre-order of the future product or a percentage stake in that person’s future profits.
These profits might be zero or they could be in the millions. Caveat emptor.
So let’s tackle this concept for college students: You are a company. You are an entrepreneur and your business is landing a career or job out of college. Right now, you have low capital because you don’t have a degree yet (or are going for a masters or PhD). This process of going to college and graduate school serves the purpose of increasing your human capital.
What can you do with more human capital? You can become a more valuable human being, that’s what! You become more and more of an asset not only for your future employers but for society as a whole. Increased human capital doesn’t always correlate directly to higher income but is commonly believed to grow economies and increase overall societal health.
Increasing overall human capital is essential to our success and it is why we all go to college today. So why not change the way in which we can obtain this capital? Why not make it available to everyone at no risk or upfront cost?
Here’s a revolutionary idea: What if the government were to invest in every young American’s future potential earnings (the outcome of increased capital)? What if anyone in America could go to any college they wanted for free? That’s the power of Human Capital Contracts.
Let’s see how it would work. We’ll take a simple example of a college freshman, Jane. Jane goes to Georgia State for four years and lands a job at Geico making $40,000 per year. In her Human Capital Contract, she agreed to pay 10 percent of future income for 10 years after college. This is great for Jane because she is debt free and is making $36,000 out of college (after paying the government $4,000 per year). Over the course of 10 years, Jane will technically have paid $40,000 for her college education, but adjusting for inflation over 14 years, that tuition cost is only about $24,000 in real dollars today.
This percentage system would work for any variation on this example. Say Jane couldn’t find work and flipped burgers at McDonalds for 10 years. She would still have to pay only 10 percent of her yearly income. On the other end, she may land a job making $200,000 per year. While unlikely, she would technically pay $200,000 for her education.
I say technically because if you think about it, no one would “pay” anything! You would simply be repaying the investment that the government made in you. Besides, in the above extreme example, Jane would have made $2 million over ten years. A small $20,000 per year for her is not going to break her bank.
A glaring issue with this concept is that it acts as a negative incentive to land a high paying job. Most opponents to HCCs will say that graduates will begin to aim lower and not push their limits in fear of making too much money, an ironic disincentive.
But to that I pose the question — isn’t that already happening in our current system? Aren’t students choosing cheaper schools and “safe” degrees because they feel trapped in their student loans? I for one would be hesitant to take out a $50,000 loan and go to Emory in the case that I couldn’t find work.
The current loan system is unsympathetic against the student and simply acts as a profit-maker for private loan companies. If you make it after college, you pay off your loan. If the system fails you, you still pay off your loan! Can’t we at least consider other possibilities?
We as students must demand freedom. Freedom of choice. Freedom of education. I call for a Declaration of Education, creating a real revolution.
We as students must start asking the questions no one wants asked. Are there no alternatives to our current loan system? Is it in our benefit to treat ourselves like companies? Can we do this without losing a sense of self?
Big thinkers and game changers will need to rise up to tackle these questions. The first step is to admit that the system has some flaws and that there are other options to consider. Then the discussion can begin and real change can come about.
