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Three Ways Politicians And Entrepreneurs Are Helping To Make Higher Education More Affordable

A short Fast Company blurb featuring two initiatives previously mentioned on Rhymes with Education: SoFi and Fix UC.

Another Take on Human Capital Contracts

Fellow Rhymes with Education contributor Andrew Bennett’s decision to ignore title capitalization conventions in his most recent post notwithstanding, he (re-)asks a very interesting question: “Why are the things we study so often so unrelated to the things we end up doing for a living?”

I don’t have the answer, but the folks at Upstart, a SF-based startup which just announced its public launch this week and boasts Dallas Mavericks owner and maverick financier Mark Cuban as just one of its many impressive funders, think that not only have they stumbled on one contributing factor but also purport to have a product which may be able to free future collegians from the dilemma of whether to follow their dreams or take the “safe route.” Their product, which is none other than a standard human capital contract (HCC), will allow those select few collegians who have the right combination of ambition, drive, and focus to escape the soul-sucking campus recruiting cycle, or the even more soul-sucking process of telling your parents you couldn’t find a job and have to move back in with them for a few weeks months years. (Note: Upstart.com is completely separate and different than Upstartbayarea.org.)

The basics of Upstart are these (and they should sound familiar to anyone who has read my earlier posts on HCCs, because they’re nearly identical) :

1. 

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3. 

What separates Upstart from other HCC vendors I’ve read and/or written about before (e.g. Lumni, 13th Avenue Funding) is its choice of target market. As a financial product, human capital contracts are relatively simple and, for all the reasons I’ve listed before, actually better than analogous debt products when it comes to financing education. From a cultural perspective, however, converting to HCCs as a remedy for out-of-control student debt is actually a pretty tough pill to swallow. In nearly all of the conversations I’ve had with people about human capital contracts, the mention of having students sell a portion of their future income, and the corresponding truth that someone else owns that portion of their future income, consistently elicits the following knee-jerk reaction: “That sounds like indentured servitude.”

In the follow-up to his blog post on New York Times’ Fixes last summer, David Bornstein picks up on this objection and writes:

It’s not clear to me why someone who agrees to sell a portion of his future earnings for a given period of time is being enslaved. The essence of servitude is a loss of freedom. What happens today for many college students who take on student debt is that they get locked into high payments that limit their career options. I’ve met many students who say they would love to spend a number of years after they graduate working for a social-purpose organization, or serving in a program like Teach For America, or trying to start a business — but many of them end up going the corporate route because of their loans. That sounds more like servitude to me.

With human capital contracts, students would have wider options. They would know that, regardless of their career choices, their payments would not be unmanageable. For example, doctors who financed their education this way could feel more comfortable going into lower-paying, urgently needed specialties like geriatrics or serving in low-income communities, where they might earn less; young professionals in many fields could trade off some income for the chance to do work that is more meaningful and potentially more fulfilling.

Well said, David.

However, rationally arguing for why people shouldn’t be creeped out by other people owning a share of their income does not mean that we can then dismiss their being creeped out. As my girlfriend and I prove and re-prove time and again, fighting rationality with emotion (and vice-versa) rarely ends well. Best to let things cool off for a while until you can both speak the same language. (Who knew there would be free relationship advice thrown in here?) Anyway, I would imagine that being uncomfortable with people owning a share of other people’s income has its genesis in our country’s complicated and troubled racial history. And just to be clear: I’m talking about slavery.

When one adopts a more culturally holistic perspective, one can understand why the water might feel uncomfortably warm when a company creates a product that “aims to facilitate buying and selling the shares of low-income students’ future income in order to provide financing for their higher education.” Of course that characterization is quite oversimplified, but it’s not technically inaccurate. In fact, as it pertains to the company I hope one day to start or work for, it’s technically accurate, which is to say, it’s dead on.

As I was saying, Upstart chose a different target market and consequently side-stepped the mine field that is America’s racial history and present. (Yes, I did jump from talking about low-income students to talking about students of color. Unfortunately, race and class are still far too inextricably linked when it comes to educational outcomes.) Upstart, on the other hand, focuses on students who see a more entrepreneurial future for themselves. As Founder Dave Girouard wrote in his company’s inaugural blog post:

We have a surplus of bright young people who want to carve their own way – to take a risk, start something new, and make a difference. They have all the energy and passion you’d expect from people in their twenties. In most cases, they’re yet to be weighed down by the obligations that curtail risk-taking later in life – spouses, kids, mortgages, health, etc. And while not generally creditworthy in the traditional sense, there are clear and measurable signals reflecting their accomplishments and hinting at their potential. Yet we collectively tell them to take the job.

Could we imagine a future where talented grads are given a modest window of economic freedom, combined with the help and support to do what they were really meant to do?

With no explicit social agenda other than to expand opportunity broadly, Upstart may just be the company that introduces HCC-like instruments to the masses. In doing so, the risk of HCC’s “experimentation phase” will be borne by those who are best able to bear it: the risk-takers among us. And when it comes down to it, that’s the essence of financial capitalism.

Upstart is beginning this fall with recruitment efforts at 5 universities: Arizona State, Dartmouth College, Rhode Island School of Design, University of Michigan and University of Washington. A quick review of Upstart’s founding team reveals notable diversity (except with respect to age, but nobody’s perfect!) for what is essential a financial/technology start up (traditionally white and male sectors). Most notable, in my opinion, is the inclusion of Damon Whitsitt as a principal. While nearly all companies’ first priority is sales, Upstart has made the impressive realization that its product is people first, and its platform second. Damon’s background is not in sales and marketing, but rather in staffing (albeit most recently nearly six years in sales and marketing divisions at Google.)

As Upstart gains traction in the marketplace, I expect they will quickly start running into SoFi. I’ve written about SoFi earlier here. Needless to say, the financing options available to students are going to get more complicated before (if ever) they get simpler.

But wait! There’s more! Upstart isn’t the only one trying to get in on the action of helping America’s 20-somethings get a jump start on changing the world. Check out Thrust Fund.  With much the same idea and target profile as Upstart, Thrust Fund, which currently lists only two entrepreneurs seeking funding. Though it should be said that if Jon’s and Saul’s profiles are any indication, Thrust seems to be going for quality over quantity.

Anyway, as always, I’m excited to see if Upstart and Thrust can make strides towards popularizing HCC-like instruments.

The Uncertain Future of American Colleges: A Roundup of Articles from Around the Internet

(By Jeff)

A quick run-down of a few recent posts from around the internet raise some interesting questions.

1. Frank Bruni’s Sunday NYT column entitled The Imperiled Promise of College. Without getting into specifics, Bruni laments the rising cost, declining benefit, and social stratification of American colleges and universities. It’s a well-told tale, but worth of repetition to be sure. Towards the end of his monologue, Bruni raises the idea of using incentives to nudge students towards “fields of studies that will serve them and society best.”

I don’t always try and bring it back to human capital contracts, but when they’re relevant, why not? One of the possible benefits of widely using HCCs is an alignment of incentives so the students who are interested in studying subjects which tend to lead to more lucrative careers (though certainly not a perfect indicator, one way to measure a profession’s utility to society is by its relative compensation) not only do so but also do so at the colleges and universities which are able to provide the best valuefor the dollar. For instance, if two students earn degrees in computer science, one from MIT (total tuition: $160,000) and one from University of Maryland, Baltimore County (total in-state tuition: $80,000; total out-of-state tuition: $120,000), and get jobs paying $80,000 and $70,000, respectively, right out of school, investors will see the latter student as earning a better ROI and will prefer to invest in her over the Harvard graduate. In effect, this will signal to Harvard that they must either lower their tuition (at least for computer science majors) or their CS graduates must earn higher salaries if they are to be competitive in a HCC finance market. (Side bar: If you aren’t familiar with Freeman Hrabowski, the President of UMBC, check out these profiles at 60 minutes and Time.)

People Capital is another peer-to-peer lender like SoFi that offers a way for students to secure loans outside of the traditional lending market. People Capital’s innovation is to use personal information such as school, major, GPA, SAT scores and length-of-time to graduation, rather than a student’s credit score like commercial lenders, to measure risk and determine interest rates.

(Side bar #2: Business Week has, to my knowledge, the most comprehensive measurement of college ROI data to date. Click here for analysis, data table, and methodology. I hope to write a future post on this topic as well, so do check back if you’re interested.)

Naturally, this leads to the question of whether colleges and universities should charge differential tuition rates based on a students course of study. Complications abound, but that doesn’t mean it’s not a valid question. I predict we’ll start hearing much more about this in the coming years as the higher education industry gets increasing amounts of push back about rising tuition and decreasing benefits.

2. For another high-profile inquisition into the benefits of college, see Richard Vedder’s Why College Isn’t for Everyone in Business Week. My first reaction: I worry about the implications of Vedder’s not-for-everyone mindset on education reform efforts that are predicated on a belief that everyone should be able to go to college (a belief that I share), especially in light of the absence of any widely available alternatives to a college degree that allow for even the hint of possibility for upwards social mobility. My second reaction: My first reaction still stands, but Vedder’s commentary on the necessity of understanding the limitation of statistical averages in telling a story is incredibly important.

Third, not everyone is average. A non-swimmer trying to cross a stream that on average is three feet deep might drown because part of the stream is seven feet in depth. The same kind of thing sometimes happens to college graduates too entranced by statistics on averages. Earnings vary considerably between the graduates of different schools, and within schools, earnings differ a great deal between majors. Accounting, computer science, and engineering majors, for example, almost always make more than those majoring in education, social work, or ethnic studies.

The phenomenon he’s referencing here is that although lifetime incomes averages of college graduates are vastly greater than lifetime income averages of non-college graduates, the variability in lifetime incomes is significant and too-often ignored. In fact, it is this variability in individual lifetime incomes that make equity instruments (such as human capital contracts) far more appropriate than debt instruments (such as loans) for financing education.

(Side bar #3: I recently came across two more interesting equity-based proposals for financing education which I will profile in more depth soon. For now, though, check out this article on CNN that focuses on a early-stage proposal for an alternative to traditional higher education finance at Clarkson University in Upstate New York. The article also briefly mentions an organization called Fix UC which advocates for an entire overhaul of the tuition system throughout the University of California system by very directly utilizing a human capital contract set-up.)

3. Planet Money produced a succinct infographic/text combo entitled What America Owes in Student Loans as a part of its ongoing What America (not sure if this is the official name or not) series. With the caveat that the Planet Money piece relies heavily on averages (see #2 for forewarning), author Lam Thuy Vo presents an interesting counter-conclusion to Vedder’s:

But it turns out that the rise in total student debt is not primarily the result of each student borrowing more money. It’s the result of more students going to college.

“The main force pushing up the total amount of outstanding student debt is growth in the number of people going to college,” said Sandy Baum, an analyst at the College Board.

Average debt per college graduate is rising — but not nearly as fast as total student debt.

Now, it may very well be that both Vo and Vedder are correct, but I wonder what it says about each of them that they choose to interpret the data the way the do?

4. I don’t make a habit of trolling the pages of the American Enterprise Institute website, but when a Google search or an article I’m reading points me in that direction, I’m not opposed to exercising my open mind. So, with that introduction, I give you Lights, Camera, Crazy!, a book review of Andrew Ferguson’s Crazy U, by Michael Rosen. The book blends, as Rosen writes, “broader cultural, political and economic insights into higher education trends with a deeply person, and surprisingly moving, account of Ferguson’s and his son’s own experience visiting, applying to, and ultimately enrolling in college.” Topics in the book range from skyrocketing tuition, college rankings (I’m getting tired of saying this, but rankings are also a planned topic for a future post), standardized testing and the blogs, brochures, websites, fellow parents and admissions officers that make up the rest of the hellish admissions process.

If there’s one thing I’ve learned over the last few years of being involved in education in various capacities, thought, it’s that no other sector of life leads to stranger bedfellows. Somewhat confusedly, I found myself nodding in agreement (though I’m going to tell myself it was only in acknowledgement) during a few passages of the review. Namely:

Much of this obscene acceleration in prices can be laid at the feet of the federal government, which, in a vicious cycle, subsidizes loans, makes direct grants, and offers loan forgiveness, all of which in turn spur higher education institutions to hike tuition further, which in turn necessitates further government aid.

“It’s the same problem that afflicts health care,” Ferguson posits. “A large portion of the people consuming the services aren’t paying for the services out of their own pocket. The costs are picked up by third parties.” One massive, 10-year study Ferguson quotes found that “each increase in Pell aid is matched nearly one for one by tuition increases” among private schools.

I don’t know that I completely agree with Rosen’s paraphrasing of Ferguson’s conclusion that much of the blame “can be laid at the feet of the federal government,” and I certainly am not on board with where Rosen seems to be heading that the federal government should stay out of education finance, but I do agree that the mechanism which he describes of increasing amounts of aid being eaten up by tuition increases leading to increasing amounts of aid and so on is alive and well. The single biggest problem is the lack (or extreme delay) of feedback signalling and the use of debt in the first place. One problem is easier to fix than the other and while I have made no secret of being a huge fan of human capital contracts and other equity instruments, I think efforts by companies like SoFi and People Capital to inject some humanity and accountability back into the process are huge steps in the right direction.

Also, the comparison of health care to education with respect to out-of-control costs and using HCCs as a possible solution reminded me of an article I stumbled across recently which proposes to use human capital contracts as a way of reining in medical school debt. This proposal is much more education than health care related, but it’s another interesting area of overlap that was worth sharing.

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Note to self: get to work on posts about People Capital, college ranking system, The Clarkson Proposal (sounds like the title of a spy thriller, right?), Fix UC, Business Week’s College ROI series.

SoFi’s Coming Out Party

(By Jeff)

In case you needed any more evidence that this has been the biggest week in SoFi’s short life, consider the following:

• If you had googled “social finance” this past Saturday, your top matches would have been the British org, California-based RSF Social Finance, Wikipedia’s “Social Finance” entry and that was about it. (If you had even heard of SoFi way back then and you tried googling them, you would have found a lot to read about “They Gypsy Pearl of Bulgarian Pop-Folk,” Sofi Marinova.)
• Sunday, TechCrunch announced their launch.
• Forbes, Business Insider, and the Huffington Post picked up the story by Monday and each ran their own articles. American Public Media and TIME, too.
• On Tuesday, the New York Times’ Bucks Blog wrote about SoFi. For some reason the Italians were paying attention as well.
• Thursday was the Washington Post’s turn.
• Reuters got in the mix on Thursday.
• And today, the finance nerds joined the party.
• Google “social finance” or “SoFi” today and SoFi makes the first page. That’s a Jeremy Lin-like arrival on scene.

So what does SoFi do? As their website states: “SoFi is ‘where social meets finance.’” (Get it?) Founded by a group of Stanford GSB students in April of 2011, SoFi has created a potentially very disruptive loan platform for students to borrow at rates cheaper than existing private or federal options and for alumni to earn “a compelling double bottom line return.” Check out the other picture in this post that isn’t Jeremy Lin for SoFi’s own visual explanation.

Here’s the synopsis using only over-used buzz words: peer-to-peer, micro-lending, social enterprise, social network, student loan crisis, impact investing, double bottom line.

A successful pilot program at Stanford last fall including more than 100 students and 40 alumni encouraged SoFi’s team to dream big. There are 34 schools listed on the website right now where they plan to support students beginning this fall (and their press release says they are shooting for 40 schools).

I’m fascinated by the idea and duly impressed with all the attention they’ve garnered this week. I still have reservations about whether debt is really the right instrument to truly disrupt the education finance market, but if it is, I expect the team at SoFi has a good chance of showing us all how.

Note: I’ve got some questions into the folks at SoFi, so I may update this post when/if I hear back from them.

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