Investing in Human Capital

A Capital Markets Approach to Student Funding

Cambridge UP, 2004

15 min read

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Society needs new ways to fund college, but will students commit a percentage of future earnings to pay today’s tuition?

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Analytical
Innovative

Recommendation

Author Miguel Palacios Lleras dedicates his book, "To those whose financial situation does not allow them to develop their full potential." Then he offers several creative proposals to make it easier for students to obtain financing for higher education. At first blush, his concept of paying for an education loan by signing away part of future earnings sounds like a modern-day form of indentured servitude. But with tuition skyrocketing and knowledge becoming more central to every facet of society, including worthwhile employment, alternative methods of financing are increasingly necessary. Perhaps this book, with its rather daring notions of human capital contracts and capital options, has some answers. Much of it is dedicated to a fundamentally sound analysis of the cost-benefit economics of education and the risk management measures required to make these ideas a reality. While it is not exactly a book you would read at the beach, getAbstract.com strongly recommends this to academic counselors, loan officers, administrators and government officials who fight daily battles to foster a more educated workforce.

Summary

Dollars and Social Sense

Fifty years ago, most Americans did not have a chance of getting a higher education. In most countries at that time, only about 5% of students went to college, an institution largely reserved for an upper class elite. Today, the system is transformed. An increasing number of countries provide financing for higher education. Underwriting the increasing demand for education in the U.S. and worldwide will require greater participation from private markets.

Economist Milton Friedman made the initial suggestion: instead of using loans as the primary means of affording "consumption," use equity instead. Friedman sparked national debates in the U.S. and the U.K, most notably in the realm of education funding. The day may come, in fulfillment of his notion, when students will receive $100,000 each in the form of a "human capital contract" (HCC) to pay for college tuition and living expenses, in return for a promise to pay a flat percentage of their future income, say 10% for 20 years, if not for their entire working lives. That’s how expensive and crucial higher education has become.

Human capital contracts are based on the belief that a well...

About the Author

Miguel Palacios Lleras is co-founder of Lumni, a firm that manages human capital funds. He is a fellow at the University of Virginia Darden School of Business Administration’s Batten Institute and he has written numerous papers on the business of financing human capital.

Miguel Palacios Lleras

Investing in Human Capital

A Capital Markets Approach to Student Funding

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Dollars and Social Sense

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