One last note, following up on previous posts about human capital contracts (ISAs) and higher education. The first is about a NY Fed report that I believe argues ISAs would increase education costs. The secondis that the features of ISAs that are meant to mitigate higher education costs aren’t likely to do so.
I’ve received pushback from Andrew P. Kelly and others on the right on twitter arguing that human capital contracts (ISAs) would help increase graduation rates, and that my arguments and evidence doesn’t capture this. Schools have varying completion rates, and reducing dropouts is an important priority. ISA creditors would have an incentive to make sure college students graduate, so they can receive more upside income. How can ISAs help? By offering better terms for colleges that have lower dropout rates, aligning the profit motive of financial capital with the goals of a better, more just, education system.
Why would we assume they do this? I want to post a toy model showing there’s a reasonable story where they won’t. (This is how the quants would approach it. The big difference is that we are taking the future salaries for granted, but that’s what would need to be modeled.)
There’s Mike. He’s 18 and could attend one of two colleges that costs the same, School A and School B. Let’s say he signs an ISA promising 10% of his income until he hits 30 in order to attend either one. He doesn’t make any money while in college, and the ISA has a discount rate of 8% (probably low given the downside adverse selection risk it has to hold).