Student Loans Based on Future Incomes: Can This Really Work?


Here at the Chamber, we like to spend our days delving in theory (and by "we," I mean people who possess a greater cognitive capacity than I do). And this concept of human capital and student loans struck some of us as intriguing.

What if students repaid loans with a percentage of their future earnings? The National Center for Policy Analysis tackled the subject. Check out their analysis, which links to the original article in the Dallas Morning News by Rebecca Tuhus-Dubrow:

Originally the brainchild of Milton Friedman, human capital contracts are seen as a way to remove the risk of overwhelming debt for students and mitigate the social costs of trying to repay it.  By gearing repayment to income, the contracts reduce those burdens sharply — a student who earns less money is obligated to pay less back. 

The Pros:

The potentially lower payments explain why human capital contracts would draw students, but there’s an attraction for investors, as well, says Tuhus-Dubrow:

  • An education fund offers investors a steady flow, protection against inflation and a more targeted hedge for large employers.
  • Investors could be motivated by philanthropic goals: wealth alumni might see this as a way to help students attend their high-priced alma maters.
  • Foundations and schools could require students to sign contracts stating that nothing is owed up to a certain point, but high-earning graduates would repay a percentage of their income, allowing the foundation to recycle that money into later classes.

 The Cons:

However, for all the benefits, the contracts pose multiple challenges in practice, adds Tuhus-Dubrow:

  • They create an incentive for graduates to hide their income and make it easier for them to not work, since no fixed payment is required.
  • Adverse selection and discrimination against low-income students could cause problems.
  • Further, it’s not clear how the contracts would be enforced, how the IRS would treat them and what would happen in the case of bankruptcy.

0 thoughts on “Student Loans Based on Future Incomes: Can This Really Work?

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