It’s an all-too-familiar scenario: the underemployed college graduate, drowning in student loan debt with no recourse but default, garnishment, and a black mark on his credit that will haunt him for years. Even in good times, prospective students think twice about taking out costly student loans when their financial aid options prove insufficient; now, when the economy seems shaky and the job market more so, many students are choosing to forego higher education, even when they have the talent and desire to succeed.
Fortunately, visionary start-ups like Lumni, founded by native Colombians Felipe Vergara (a Miami consultant and entrepreneur) and Miguel Palacios, assistant professor of finance at Vanderbilt, re-envisioning the student loan. They are introducing the concept of micro-loans into the realm of college finances, using the theory of “human capital contracts.” In other words, your lender provides funds based on your future earning power, rather than your current financial status.
It works like this: you convince the lender to invest in you by showing potential and initiative. After graduation, the lender collects a return on investment, typically 4-8% of your salary for a period of 120 months (10 years). The repayment percentage is capped in your contract, so you don’t have to worry about costs growing unpredictably. If you are unemployed, you don’t have to make payments until you find a job. If you are underemployed, your payments are reduced accordingly. To ensure participants’ success, investors like Lumni and Enzi offer career coaching and employment resources.
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. 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 life-long 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.