Imagine that a student who wants to attend college, but does not have the resources to do so, signs a contract with an investor in which he commits to pay 10 percent of his income for twenty years after graduation in exchange for $100,000 received today to pay for tuition fees and living expenses. This contract, which gives the investor a 10 percent stake in twenty years of the student's income, is an equity-like instrument named here a “human capital contract (HCC).” This book provides an answer to why exploring these instruments matters, why their existence is desirable, how they can be implemented, how they relate to other instruments available for financing higher education, and the implications of all this for designing instruments for financing higher education.

Private funding of higher education

The first important point to consider is that greater participation from private markets is required to face the increased demand for attaining higher education throughout the world. The participation of private sources in the financing of education can increase capacity in two ways. First, private sources offer students a mechanism for financing their education – the whole idea behind this book. And second, where institutional arrangements permit, private markets will direct resources with some regard for the quality of education offered by different universities, thus creating pressure on higher education administrations to be more competitive.

But private capital will come in only if the prospect of obtaining a positive return, vis-à-vis the risk taken is attractive to investors.