May 26, 2007

Intellequity: A VC-like Concept to Tackle Higher Education Debt

With June right around the corner, college campuses around the country are seeing commencement exercises and graduation ceremonies filled with pomp and circumstance, as they hand thousands of students pieces of paper that exit most of them from the campus and into the world of earning a living. Some may already have started new jobs. Others may just be starting that search now. But for many, the years of schooling have already put them deep in the hole financially. While the mood on the day of graduation is a gleeful one, the issue of debt is very real, one that could be haunting some for a very long time.

Uber-blogger Chris Pirillo highlighted this issue in a two-parter today on Student Loan Solutions and Student Loan Debt, concluding that he doesn't know if student loans are "more of a hindrance than a help." The major issue, he writes, is that forward-looking young adults are expected to get an education, whether we can afford it or not, meaning some are weighed down "with tens of thousands of dollars in student loan debt before we’ve even had a chance to see whether or not our higher education was actually worth the price of admission."

While I was in college, I occupied an odd middle ground where my parents' collective income was too high to qualify me for financial aid, but their month to month struggles meant that the tuition checks going home weren't always covered on time. Some months, the way I'd find I was negligent was that my meal card for on-campus dining would simply stop working, sending me to nearby eateries in Berkeley, bleeding away my already low cash on hand. But the good news was that I managed to pull through, getting a degree in four years without establishing debt. Other friends of mine, also entering their early 30s, did qualify for financial aid, but also racked up debt, some into the six-figure range, and to date, haven't made much headway. In fact, one of my best friends, whom I've known for half my life, may have to file for personal bankruptcy just to clear the deck and start over.

In the heady dot-com mania of the late 1990s, when everybody had a business plan sure to make millions, I had come up with what I saw would be a sure solution - a program I had dubbed "Intellequity". The concept was that instead of basing loan agreements on current cash on hand or current income levels, I would set up a company that doled out loans to promising students or recent graduates. The better the prospects seemed for a student, the better the loan terms would be. Effectively, based on a detailed matrix of experience, grade point average, major, brand name of the attended school, and a small battery of aptitude tests, and interview, we would offer loans that would not come due until the applicant began their first salaried job.

The student would not incur a specific dollar value of debt at all. Instead, the way the "Intellequity" project would be funded was through asking for a small percentage of future income over a set period. For example, if $10,000 were the loan amount, and the candidate were to have established a 2% payback rate over an 8 year period, they would pay Intellequity 2 percent off the top for 8 years. Assuming the applicant made $500,000 in salary over the 8 year period, the pay back would be the same $10,000. But if they made more, the company would gain a profit. If they made less, it would be our loss. If the payback rate were higher, say at 3% or 4%, the return would be that much greater as well.

Those applicants who didn't see their career paths pan out they way they had planned would not be equally burdened as those who had skyrocketed, those who we had taken a chance on. The risk would have been transferred away from the student who started accruing interest right away, but instead, to those of us funding the individual. In effect, it would be acting like a VC firm, not for a business, but for an individual. Some investments, as with VCs, would be duds. Others could make millions. And Intellequity would become a partner with the student, finding them better paying jobs and opportunities, hoping to push the individual toward a route that would make them more money in the end.

Would bringing a VC-like environment to the student loan process work for everybody? Of course not. But it sure would make things interesting, and it would eliminate the problem that some students find themselves in from the day they walk the stage and throw their mortarboards in the air - one of being alone and in debt from the very beginning.


  1. Very interesting. Whatever happened to the idea? The part that's problematic for me is that there's a slight disincentive for graduates to take higher paying jobs since they'd be giving up more money to the investors (they'd keep more too, but would the assumed extra hours and effort be worth it?). Perhaps if there were an early pay-back discount, the incentives would be lined up for both sides.

  2. I think with a few suggestions, as with the ones from Erin, you're onto something.

  3. Erin, not being a major financier or having access to massive capital, I knew it was an interesting idea, but not one that was for me to jump on. I don't see the barriers to entry being so much on the graduates taking higher paying jobs (they'd keep more in the end too), but in making money for the company. In effect, it's possibly a low-margin high risk play, unless all the stats are worked out. My guess is that somebody with time and an army of calculators could go to work and find out it's not that great an advantage anyway. For example, if I borrowed $50,000 to cover tuition, I wouldn't want to be burdened to the tune of 15% for 20 years. (A dramatic example, but one potential equation.

    I did send the note to Chris Pirillo, who started up the conversation. Maybe he has some powerful friends who can use it.