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This chapter is from the book

Securitizing Human Capital

Now, I am not the first person to think about securitizing human capital. (Securitization is the process by which a cash-flow-producing asset is repackaged as a security and sold to investors.) This concept can be traced back to the well-known economist Milton Friedman in an article titled, oddly enough, "The Role of Government in Education."2 This concept has also more recently been advocated by Miguel Lleras in his book Investing in Human Capital. Friedman, Lleras, and others have pointed out some of the potential pitfalls in programs that attempt to securitize human capital. For example, how do you enforce payment? What happens in the event of a student's bankruptcy? Can these payments be considered tax-deductible from income, like corporate debt? Does such an arrangement risk being labeled usurious (that is, charging exorbitant amounts of interest) if income payments far exceed the initial equity investment? As with any ambitious plan, the details have to be ironed out. But I think the idea itself has merit and should be considered, at least on the individual level.

In the next few sections you will see how the decisions about where to go to school, how much time to spend learning, and what to study can together have a huge impact on the valuation of your human capital. Here's what I mean in practical terms: Two 25-year-old graduate students sharing an apartment might both have little in the way of financial capital, real liquid assets, or income. Their traditional accounting balance sheets likely display a negative net worth. Yet, depending on their chosen courses of study, their holistic balance sheets can look completely different. One might have a human capital worth millions of dollars, whereas for the other it might be measured in hundreds of thousands or even less. Moreover, as you will see from the discussion of the net worth and financial and asset holdings of college graduates, not only might their earning power be different, but the types of assets they are likely to hold in the future can also be quite different, which has yet other implications I explore in later chapters. Because I thought you might like to calculate the impact of an investment in human capital on your personal balance sheet, I have created a calculator at www.qwema.ca that enables you to project the payoff from an investment in human capital, based on your age, expected investment in education, and expected increase in income.

In short: Education decisions have deep and persistent impacts on your financial situation for the rest of your life span, and those impacts are not necessarily obvious at the outset of your educational path. The undergraduates I encounter in my personal finance course have already made the decision to attend college, and they've already (for the most part) chosen their course of study. This chapter is designed to get my thinking about the impact of education on human capital into the hands of a bigger audience—so you or your kids, too, can properly estimate and add the value of investing in human capital to your personal balance sheet.

Using the metaphor of Dynamic Control Theory (DCT), education is one of the variables that impacts your financial well-being and that is controllable. (You can control how much you get!) In a life filled with uncertainty, there is robust evidence that educational attainments pay off over time, and that they can set you up to achieve far greater wealth than you might otherwise.

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