All entries for Friday 01 July 2005

July 01, 2005

Alternative student funding

The times wrote an article over the weekend on a couple of companies offering student funding for education in return of a cut of future earnings.

The brightest British teenagers are to be offered cash up front to pay for their university education in return for agreeing to sign away a portion of their future earnings. Specialist investment funds, which offer such deals to American school-leavers, are targeting Britain in advance of the introduction of top-up tuition fees next year. The funds run by venture capital firms aim to make a profit by backing students whom they believe will command big salaries. In return for their fees, students sign contracts that would typically hold them to handing over 1%-4% of their pay for up to 15 years.
"We have done a lot of research in the UK and we think the market for our education investment product will be very similar to the US," said Raza Khan, one of the founders of My Rich Uncle, which has funded more than 1,000 students since it was set up in 2001. ďThere is not much legislation covering investments in individuals, but we are confident what we are doing is legal and helps people who would not otherwise be able to fund their education."

Read the full article here.

The system looks pretty interesting. I imagine itíd be of most use to those who are following non-standard education paths for which government funding isnít guaranteed or is insufficient. E.g. Students who wish to study abroad or students who wish to study independently for professional qualifications.

More than ever, students who acquire funding in this way must undertake careful planning, considering future career paths and changes in earning potential over time. After all, being forced to pay 4% of £20 000 for 10–15 years canít be too much fun is maximum earnings in the profession are only £25 000. The selection criteria for the scheme would no doubt filter out those who would see finances and living standards seriously strained by repayments anyway.

The companies mentioned in the article stress that no pressure is placed upon students to pursue a given path. So long as students stick to the payment proportion and duration agreed upon, nothing more is owed to the lending firm. Even in the case where a firm and student mutually agree upon a future career path, there is little problem. The contract was entered voluntarily and one trusts that the individual considers it in his/her best interest.

No mention is made of a minimal income beneath which payments wonít be collected. An individual on the minimum wage canít realistically be expected to handle loan repayments simultaneously. The need to attract students would do doubt ensure claims are income contingent.

Despite the likely availability of such funds, I still think the government has a role in providing funds at minimal interest, which must be paid back in full. Such funds would be for students pursuing standard vocational and higher education courses.

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