Use equity investments to fund education

Meet "Yuchi," a 17-year-old high-school student, originally from northern China, the only son of middle-class parents. He likes sports, music and going out with friends, but Yuchi is not your average teenager.

He is the winner of the national mathematics competition, one of the most competitive contests in the world with hundreds of thousands participants competing in multiple rounds all over China. Yuchi graduates from high school next year and is determined to go to a top university abroad and be the first in his family to attend college. He dreams of becoming a top scientist and developing solutions for some of the world's most pressing problems.

Financing is a problem, though. Yuchi's family cannot afford the tuition, books or living expenses associated with studying abroad. Even scholarships are unlikely to cover all the costs, and a bank loan is not an option as Yuchi's parents do not have adequate income or assets to secure the loan.

Even if they could obtain a high-interest loan - thus incurring debt several times larger than their lifelong savings - Yuchi is not confident in his ability to pay it back. As a scientist, his earning power is highly uncertain, and under this scenario, Yuchi's dream is likely to remain a dream.

One solution could be to create a new class of equity investments - ones focused on human capital. Under such a scheme, instead of taking a bank loan, students would enter contracts with investors whereby the investors finance education in exchange for a percentage of the students' income after they've graduated. For example, if an investor promises to pay all the costs of Yuchi's education at a top university in the United States, Yuchi might promise to pay the investor 10 percent of his salary for the first 15 years of his employment after graduation. The percentage and duration of payments would be calculated based on the amount invested, choice of university, country of residence and field of study, as well as taking into account potential rates of default.

If Yuchi becomes a professor at a state university with a small salary, he may end up paying less than the total cost of his education. If, however, he becomes a top scientist acquiring multiple patents, he will pay the investor much more than he originally received.

To take things one step further, instead of one-on-one relationships between students and investors, pooled investment vehicles could be developed. Similar to other private equity funds, a human capital fund could raise money from limited partners for the investment in human capital.

Fund managers would select students, finance their education and collect the payments, which go back to investors as dividends. Such funds would be long-term in nature (a minimum of 15-20 years) and thus will attract long-term investors: pension funds, insurance companies or endowments.

There are three major benefits of human capital investing, one for each of the main stakeholders. First, talented students worldwide would have access to quality education that they otherwise would not. Second, investors would earn attractive returns while investing in a good cause. Third, society would benefit by harnessing unprecedented amounts of high-quality talent, which otherwise might go undeveloped.

There are admittedly some potential legitimate criticisms of such a model. Some would likely equate human equity funds as a form of a modern indentured servitude, and this is a valid concern in cases where investors could influence students to pursue certain (higher-income) career paths, thus depriving students of free choice. Second, the enforceability of contracts, collection of payments and taking corrective actions in the event of default could present jurisdictional challenges. This is of particular concern in the case of highly mobile students, who will move from one country to another during their careers, and are thus difficult to track. Third, the system could incentivize students to hide their true post-graduation incomes. This would likely be a particular problem in emerging markets, from which a large proportion of students will likely come.

While many of these problems must still be coped with and there are details to be ironed out, the concept of human capital investing has significant potential to change the global approach to financing education.

There are millions of students like Yuchi in China, India, Russia, Latin America, Africa and the rest of the world waiting to fulfill ambitions and unleash their full potential. For now, society is missing out on all this potential, cumulative talent, knowledge and energy, and as Benjamin Franklin once said, "Investment in knowledge always pays the best interest."

Now is the time to start earning some of that interest.  

- The author works for Goldman Sachs in London. He is a graduate of the University of New York in Prague and the INSEAD MBA program.                           

Tomáš Kubica can be reached at
features@praguepost.com