The American Interest
Analysis by Walter Russell Mead & Staff
Debt Relief Chicago Startup Invests Directly in Students

One idea for dealing with the student debt problem that has been kicking around for the past few years is “equity-based financing.” It’s a system in which people “invest” in college students, helping them pay for their tuition in return for a percentage of their future earnings. The idea sounds good on paper in other ways: markets funding certain degrees could end up being a powerful signal as to which programs are worth their sticker prices.

But the idea has remained largely untried. Until now. Enter Educational Equity, Inc., a Chicago startup that is dipping its toes in the water. As the company’s founder said in an interview with Forbes, he prefers to focus on a narrow range of degrees with steady returns and students who have demonstrated commitment in their previous endeavors:

Rather than grouse about the sanctity of contracts, Davis says he prefers to focus on reliable but lower-sizzle fields such as school administration or engineering. In those arenas, extra education produces sturdy gains in earnings power without creating individual bonanzas that are likely to lead to quarrels. In fact, Davis’s contracts specify that the repayment terms exempt any participants’ income above $200,000 a year. [...]

The earliest participants in Davis’s Education Equity program tend to be former Teach for America corps members who now are looking to become principals. Davis says he is impressed with their individual drive and focus; he also likes the fact that cohesion among these participants makes them more eager to do well, so that future generations of TFA alumni can be seen as prime candidates for principal-training programs.

Smart. This could be one to watch.

Published on April 20, 2014 12:15 pm
  • Jacksonian_Libertarian

    What is needed is cheaper affordable education, not another way students can go into debt, they can’t repay.

  • Gerald

    I’m not sure why this is a good idea for either the investor or the student. From the investor perspective the return of capital and the portion of income will not only be uncertain, but will likely be taxable at ordinary income rates. For the student there will still be a relatively high rate of debt, and an impairment of future earnings that will detract from credit ratings as well as income. Speaking as an investor, I would rather just fund co-op (working) scholarships to highly qualified applicants through charitable deductions.

    • Andrew Allison

      Good argument, but it occurs to me that funding scholarships through charitable contributions has its own drawback, namely what’re “highly qualified applicants” The inequality police will be watching.
      In the case of the investor, the risk/reward ratio has penalties. If you invest in a drop-out or easy course graduate who can’t find remunerative employment, you earn a meager return on your investment, wheras in the charitable contribution case, the donor’s ROI(tax benefit) is the same regardless of the result. Seems to me that the incentive is wrong.

  • Fat_Man

    I think Yale tried this a few years back. It was a flop that produced far more bad feeling that money.

    Jacksonian is right. The problem is not financing demand. There is way too much money flooding into the system now. Opening another spigot will just make it worse.

    What we need is cost control and accountability from the higher education industry.

  • rheddles

    Voluntary Servitude.

  • buckw

    I wonder how much control the investor will have in the student’s career path after graduation. Every decision that the graduate makes from resume content to job choice will affect his earning potential. With the investment comes an outside board of directors who would have some control over these basic decisions.

  • Jonathan_Silber

    Play the sure thing: invest in graduates of women’s studies.

  • John Humphreys

    How many new companies are going to claim to be the first to do this?

    Lumni has been providing personal equity finance for about 10 years and Human Capital Project has been running for seven years, and several other personal equity matching services started in the US in the last few years, and an institute in California accepts payment in personal equity, and even Mohammad Ali used personal equity to finance his early training.