The U.S. government’s “pay as you earn” program for financing college students’ education is immoral, as it forces taxpayers to subsidize student loans and to assume the financial risks of doing so, which violates their rights to control their own wealth and to decide for themselves whether to lend money to students. Fortunately, Lumni, a pioneering private college finance company, offers an inspiring example of how students can acquire college financing by strictly voluntary means.
Lumni provides “human capital financing,” also known as “income-share agreements,” through both for-profit and non-profit funds, to low income students in Chile, Colombia, Mexico, Peru and the United States. Through these agreements, students get college financing in exchange for paying a contractually fixed percentage of their subsequent income for a fixed period, up to 120 months, after which “The student’s obligation is complete . . . regardless of the sum paid to date.” “Under this design,” Lumni’s website states, “students face little risk of overly burdensome debt payments, providing peace of mind for the debt-averse populations that are most in need of funding.”
Because Lumni’s “pay as you earn” repayment plans are not loans in the traditional sense, investors in its funds assume risks similar to stock mutual funds—they “share” in the college graduates’ economic successes to the extent the graduates succeed. Writing for the New York Times, David Bornstein likens Lumni’s approach to the financing of start-up companies: Not all students succeed as expected, but most meet or exceed expectations. Lumni screens its applicants carefully, tailoring the financing arrangements to the projected salaries in the student’s chosen occupation, among other considerations.
Lumni’s model has been quite successful, notes Bornstein, albeit on a limited scale to date. U.S. News reports that Lumni, which started in Chile in 2002 and expanded to the United States in 2009, has achieved average returns of 7 to 11 percent in countries other than the United States. Lumni’s founders, Vanderbilt University finance professor Miguel Palacios and entrepreneur Felipe Vergara (both Colombians) expect their for-profit funds to outpace the non-profits over time, and envision Lumni’s target market in the millions of low and moderate-income youngsters worldwide, notes Bornstein.
Lumni, which terms its model “a win-win partnership [for] students and investors,” highlights the kind of moral, rights-respecting, practical education-financing solutions private, entrepreneurial individuals contracting voluntarily can deliver in a free market.