News Release

December 9, 2002

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Human Capital Contracts Better Choice in Financing Higher Education
New study shows human capital contracts are viable alternative to student loans

WASHINGTON -- With the cost of higher education increasing every year, the need to find new financial sources is clear. Many education experts have pointed to human capital contracts as an alternative form of student aid. Human capital contracts are a form of financial aid, where "a student receives funding in exchange for a percentage of his or her income during a fixed period of time."

In a new Cato Institute policy analysis focusing on human capital contracts, Miguel Palacios of the University of Virginia's Batten Institute examines the benefits of what he describes as "innovative financial instruments for the private financing of higher education." Palacios argues that these contracts "have the potential to increase the amount of funding available for students and reduce the cost of education financing."

Palacios observes that human capital contracts offer a privately financed alternative to other forms of student financial aid, arguing that "with education costs rising steadily and a shortage of student aid, new instruments are needed to finance students who have the capability and desire to go to college but do not possess the needed resources." In addition to providing benefits to the student, this "equity-like" instrument can be a good investment for a business that chooses to contract with the student, since the student would agree to give back a percentage of income earned after graduation.

According to Palacios, both investors and students can benefit from human capital contracts, because they relieve the student from uncertainty about being able to make fixed loan payments; they virtually eliminate default due to financial distress; and they provide subsidies only to those whose incomes require it.

Palacios observes that "the fact that education offers attractive returns on investment" should elicit interest from "those who possess the capital to finance the education of students."