We should make sure that the private education incentives are better aligned.

Sir, while we wholeheartedly agree with your support of “The private role in educating the poorest” February 17, we cannot but observe that perhaps everyone could benefit from having the incentives of the educators somewhat better aligned to the final results for the students. This could perhaps be achieved by having the educators, instead of collecting all their dues cash, upfront, receiving participation in the future earnings of those who they supposedly educate to be able to earn.

This idea of “Human Capital Contracts, that as far as we know was first advanced by Milton Friedman in 1954, is indeed a real education revolution waiting to happen, and a small company called Lumni is showing us the way having already managed to finance the education of some students in Chile and Colombia against a modest percentage of their future earnings, for some months or years.

You also mention the role that building brands could have in education by motivating the quest for quality, but there we should hope that those brands are not purely the result of advertising budgets and that the promises of those brands are backed up with the investment of some real money of their own. Ideally the “Human Capital Contracts” should be standardize in such a way as to permit their securitization, and thereby mobilize the resources that are much needed. Investing in the future earnings of our youth sounds more than reasonable, perhaps even for the professors’ retirement fund, that is of course if the professors really can deliver on their promises.

Following this route, will also diminish the risk of seeing someone suing their Alma Mater for failing in delivering its services.

When are business schools really going to make education their business?

Sir looking at the high tuition fees of many business schools one wonders if they are not setting themselves up to be sued by their graduates for failure in delivering what they promised as indeed the current incentive structure seems a bit misaligned with students investing their futures and paying for it and schools only collecting present values.

Lately there has been some talking about Income Contingent Loans as a way out for the students that get trapped between high education debts and unrealized earning hopes. The problem with these ICL is that they are mostly based on some government subsidies while it might be time for schools to really make education their business and share the risks by investing part of their fees in participations of their students’ future earnings.

Business schools might argue that they need all their money now to pay for their huge costs but, honestly, if they cannot manage to securitize those participation contracts and sell them to the financial markets when everything else seems to become securitized then they should perhaps not be allowed to call themselves business schools either.

The first who to our knowledge broadly advanced this idea was Milton Friedman in 1955 and lately Miguel Palacios of the University of California has also been writing extensively about what is called Human Capital Contracts. Their splendid ideas have yet not taken hold much, perhaps because the education providers themselves have lacked the incentives, but this might change rapidly, after the first suit.