This is the very first page where I developed the idea which I present in more detail in Private Insured Student Loans.
I begin presenting this concept starting from the very The Market Inefficiency it aims to solve and only later vaguely discuss the Concept Company’s Offer and lastly Origin of Profits.
The Market Inefficiency
The starting point of this concept is the recognition of an inefficiency that takes place, in particular, in the student loan market in the USA. The inefficiency does not arise from a lack of money being exchanged between willing parties but rather from the inability to transfer risk. In fact, a student, by borrowing a substantial amount of money, takes on the biggest financial risk they could ever assume—sometimes comparable to a mortgage and with a highly unpredictable outcome. Buying off risk is a process that is already well known and called insurance. Insurances can take many different forms; for the purpose of this discussion, I consider a contract in which the credit owed to the lending institution depends on the student’s first gross salary.
In conclusion, the most elementary solution to the market inefficiency would be to offer students an insurance policy. What I propose, however, is something substantially different and goes far beyond the business model and offerings of insurance companies.
Beyond an Insurance
Instead of a conventional insurance scheme, the concept company connects students with individuals willing to finance their education under a specialised contract. This contract stipulates that the student repays their debt as a fraction of their future income. In this way, there are two unique advantages for both parties: the financier profits from the investment precisely when the student succeeds financially.
This latter point is crucial because an efficient matching of borrower and lender would open and incentivise a communication channel that would otherwise have little reason to exist. This, in fact, is where a second market inefficiency arises—the one concerning the offering of networks, skills, and resources to younger generations.
Concept Company’s Offer
The main offer of the concept company is to certify the authenticity and intentions of both parties. The company ensures that the profiles of both borrowers and lenders are well coordinated and that the best possible match can take place. The main goal of the concept company is therefore to build the concrete digital workplace where borrowers and lenders can connect and take the first steps towards stipulating a contract, ensuring that their interests and expectations are aligned.
The company also takes responsibility for ensuring that both the lender and, in particular, the borrower have a very clear understanding of the contract. On top of that, the company offers standardised contracts for different types of borrowers and lenders, so they do not need to start from scratch in defining how the return on the lender’s investment will take place.
Origin of Profits
There are several ways in which the concept company can generate profits from the described business. First, since all documents submitted by the borrower must be carefully verified, there will likely be an entrance fee for creating a profile; a similar fee and verification process can be required for the lender. During the contract drafting phase, assistance from financial advisors will be offered and made mandatory to ensure both parties’ understanding, with a margin applied to this service. Finally, a commission fee can be imposed on the borrower’s repayment of the debt.
In a much longer-term perspective, one can imagine students becoming an asset class, not unlike start-ups, which could be grouped into actively managed investment funds.