Buying Equity in a First Grader?

As part of a competition I am involved in with a group of Harvard Kennedy School classmates, I’ve been enjoying exploring ways in which organizations can creatively implement investment strategies that offer both financial returns and social returns. This idea, impact investment, is an increasingly popular concept because it is a sustainable model for achieving social returns (in contrast to philanthropic or charitable models).  Impact investing is also often called triple bottom line or blended value.  As described by Paul Sullivan of the New York Times, impact investing is an “emerging hybrid of philanthropy and private equity.

Although mixing social good with high returns seems like a sexy investment concept, impact investing is still in its infancy.  It is estimated that current impact investments amount to approximately $50 billion and is projected to grow ten-fold by 2014, but still only barely reaching 1% of all managed assets.  The existing impact investing players, such as Acumen Fund, Root Capital, and Grassroots Business Fund, have proven models of success with high and sustainable returns.  Non-profits such as Endeavor and Ashoka have also played a valuable role in supporting individuals who want to develop and implement their own impact investment ideas.

Many of the innovative models revolve around doing debt financing of export commodities, or tying the loan to some sort of productive asset (like a sewing machine, drip irrigation system, etc) such that future earnings can be used as a substitute for traditional commercial collateral.  But one idea I’ve been thinking about recently is quite different — why not invest in human capital directly, reaping returns from potential future earnings as a substitute for collateral or traditional loan re-payment?  Here’s the basic idea:

The need: The marginal cost of annual school fees, for example the 500-rupee cost ($10)  in Jalandhar, Punjab, of entering 8th grade in public (government) schools, is often the limiting factor for a high-achieving student from continuing their education.  The child’s family does not have commercial education loan options available that don’t require burdensome repayment in an environment of uncertain returns to education. There is a significant under-investment in education in many parts of the developing world, for a whole host of reasons — the cost of enrollment, the opportunity cost of lost earnings, the low quality of schools, and the uncertain economic returns to education.

The concept: Imagine if you could tell a first-grader in that all of their education costs will be covered for as long as they wish to study — through grade 10, through college, through law school, PhD — whatever thay choose — in exchange for a fixed percentage of their post-graduation earnings.  Essentially, transfer the risk of returns to education investment to a third party.  A company would establish and manage a social investment fund that invests in the secondary education of a diverse pool of students.  The fund would commit to financing all education costs, in exchange for a fixed percentage of the student’s future earnings.  The students face little risk of overly burdensome debt payments, students receive a flexible source of financing needed to complete their education.  Rather than a loan, education costs are financed up front in exchange for a form of “human capital” collateral.  Payments are zero when income is zero, and payments are low when income is low.

Any existing players? Lumni is the sole player in this space right now that.  Lumni focuses only on financing college-level education, and the typical contract involves a 4% repayment of future earnings for 120 months following graduation.  Currently Lumni operates both for-profit and non-profit funds in Chile, Colombia, Mexico, and the U.S., with over $15 million in commitments from 100 investors, financing almost 2,000 students to date. Since Lumni profits more when students earn more, they also have active career coaching, job search help, and other professional development functions available to their students.  Their model is depicted in the diagram below:

Can this model truly work at the secondary or even primary school level? Lumni is paving the way in college education financing, but what about applying their same model to primary or secondary education in the developing world?Definitely a host of obstacles arise.  Would it be possible to truly predict the future earnings of a first grader in rural Mali?  How would you factor in mortality rates, or school drop-out likelihood?  Would the model of repayment through future earnings too closely resemble an indentured servitude arrangement and receive negative public feedback?  Would students have perverse incentives to avoid repayment, or take lower-paying jobs during the repayment period?  I’m interested in any and all feedback.


About Pamela Sud

Pamela Sud is currently a joint MPP/MBA degree candidate at Harvard Business School/Harvard Kennedy School.
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8 Responses to Buying Equity in a First Grader?

  1. Alanna says:

    Several social entrepreneurs tried something similar:

    It’s hard for me to see this working at the elementary level because ethically, can children consent to his?

  2. Jason Kerwin says:

    This is fundamentally a great idea because it sidesteps a lot of the issues typically associated with lending to the poor for education: principal-agent problems, self-control problems, etc. That of course is if the lender pays the fees directly.

    On the downside, limiting repayment to 10 years does create a slight incentive problem, especially toward the end of the period. We should fully expect earnings to jump right at 120 months. I see a bigger concern with contracting: are these enforceable? How? What if people move around? With such small payments per person per month it may not be worth it for lenders to chase folks down.

    The ethical issue raised by Alanna probably isn’t a huge deal; for better or worse we tend to assume it’s generally okay for parents to contract on their children’s behalf. A backlash about “indentured servitude” is more likely to cause problems.

  3. Bryce says:

    In one sense this concept might work far better for primary education. Lumni faces a potential problem of adverse-selection in favor of students who want to pursue careers where the tuition is high relative to future salary, e.g. social work. Funding elementary schoolers who are presumably far less certain about their eventual careers should avoid this problem.

  4. James W says:

    I like the idea, but don’t think it’s realistic to expect the children to pay back the loan. I’d be interested to see how many alumni give to their k-12 school systems vs giving to their university. It might show you how likely a loan will be paid back by a student that does not pursue higher education.

  5. Dan Futrell says:

    I like the innovation here, but there will be an incentive problem. What’s the barrier between investor and the investee? If it’s weak, there is significant incentive for investors to pressure their investments to pursue high paying careers in finance or consulting, an industry that perhaps is not the best use of the student’s skillset.

    On a macro level, if this kind of investing were to take off, low-paying sectors like teaching, social work, and non-profits would be on the losing end of talent, and aren’t those the exact sectors we want to thrive to improve lives?

  6. pamsud says:

    Appreciate all the comments – thank you!

    @Alanna — I found the Transcapitalist article you sent really insightful. Definitely points out an important criticism of the personal equity approach: if investors were really interested in your ideas or causes, they should invest directly in them (where the value is more tangible) rather than in you (where valuation is difficult). But its counter to that was interesting: perhaps with a good methodology developed, personal investments might be easier to evaluate than idea investing. I believe I can evaluate the future successes of individuals much easier than I could evaluate the potential successes of the companies they found.

    @Dan Futrell — Interesting point that there might be higher incentives for the investors to push individuals into higher-paying jobs, and important jobs like teaching, social work, and nonprofits would lose out. But I could also envision the student having an INCENTIVE to pursue lower-paying careers like social work, art/design, non-profit work because they are not burdened by debt of student loans.

  7. Pingback: Infrastructure for Investment | MethodLogical

  8. Allan Shore says:

    Nice piece. Good conversation. I hope you don’t mind that I drew attention to your piece in The Hub. You can see more about it at I loved your photo and saw no attribution so assumed it was for use under Creative Commons. Let me know if not. Thanks and keep up the good work.

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