Student Sponsorships and Education Investments
This section of FinAid provides information about student sponsorships, where a third party provides the student with money to help pay for their education.
Sponsorships are much more common in Europe, where private benefactors sponsor students from the local community. In the United States sponsorships are much less common. International students talk about "finding a sponsor" while US students talk about "finding a scholarship".
Origin of Education Investments
In early 2000, a company called iempower (later renamed MyRichUncle) launched a form of sponsorship called "Education Investments". Students would agree to pay a percentage of their income for ten years after graduation (with deferments during periods of unemployment and low income) in exchange for funding. The typical fee was 0.2% to 0.5% of income for each $1,000, with the rates being set according to the student's college, field of study, GPA, year in school and other demographic factors. Students liked the education investments because it shifted the employment risk from borrower to investor. But investors had difficulty understanding the cash flow characteristics of the education investments, making it difficult to raise capital through securitization or other means. MyRichUncle was also concerned about states wanting to regulate the education investments like loans. MyRichUncle eventually switched from education investments to more traditional private student loans, and filed for bankruptcy in 2009.
Another company called College Degree Fund launched in 2008 but switched to facilitating more traditional "micro" sponsorships. Their web site stopped functioning in late 2009 and is now defunct.
Existing Education Investment Companies
There are two existing companies promoting education investments:
Fix UC is an organization formed by the editorial board of the Highlander student newspaper at the University of California Riverside to propose ideas for solving the University of California (UC) funding crisis. Fix UC's Student Investment Plan is an education investment proposal under which UC students would agree to pay a fixed percentage (5%) of their salaries for 20 years of employment after graduation instead of tuition and fees. The requirement to make payments would be suspended during periods of unemployment. Transfer students would pay 1% less of their income (i.e., 4%). Graduates who live and work in California after graduation would pay 0.5% less. People working in public sector occupations would pay 1% less. Out-of-state and international students would pay 1% more. Students living in university on-campus housing would pay an additional 0.65% per year of housing for a ten year period. Financial aid and student loans would be eliminated. A variation on the proposal would not require payments until the graduate's income exceeded $30,000 and would cap income subject to the contribution requirement at $200,000.
The following patents relate to this type of human capital investment:
See also Milton Friedman, The Role of Government in Education, Economics and the Public Interest, Robert A. Solo, editor, Rutgers University Press, 1955.
CollegeDegreeFund.com is a for-profit business that facilitates college sponsorships. Students create free listings on the site to tell their story and their need for funding. Sponsors contribute money in amounts as low as $5. The students can withdraw funds only after the company verifies enrollment through the National Student Clearinghouse.
Contributions are not tax deductible for several reasons. First, CollegeDegreeFund.com is a for-profit business. But even if they were not a for-profit company, the contributions would still not be tax deductible, as contributions on behalf of a specific individual are generally not tax-deductible.
CollegeDegreeFund.com earns money from fees charges on contributions and withdrawals. There is a 5% processing fee per contribution to cover credit card and Paypal fees and other costs, and a $5 processing fee per withdrawal.
CollegeDegreeFund was founded on March 27, 2008. The web site changed in December 2009 to an "under construction" page.
Education Investments (MyRichUncle)
MRU Holdings, the parent company of MyRichUncle, filed for Chapter 7 bankruptcy on February 9, 2009. As such, new education investments are no longer available. The following discussion is retained for historical reasons.
In the MyRichUncle model, private investors provide funding to help students pay for their college education, in exchange for a fixed percentage of their annual income for a fixed number of years after graduation. For example, a student might receive $10,000 in funding in exchange for 2% of the student's income for ten years after graduation. (The actual percentage depends on the student's application.) In essence, these benefactors are investing in the student's future potential.
To apply, the student completes a detailed questionnaire about his or her educational background, intended academic major, work experience, and colleges. MyRichUncle uses sophisticated statistical models to determine the income percentage they will require in exchange for each $1,000 of financial support. Typical payback rates range from 0.1% to 0.3% per year per $1,000 in funding. MyRichUncle also receives a fee of 2.5%, which is deducted by the investor from the amount of funding received by the student.
MyRichUncle is an interesting alternative to education loans, especially for students who fear debt or are concerned about their ability to repay student loans in a tight job market. Since the income percentage is a fixed percentage of income, students find it easier to plan for their financial future. In essence, the investor is assuming the risk that the student will be able to find a good job, providing the student with peace of mind in addition to funding. The MyRichUncle model is most appropriate for students who are pursuing business, technology, finance and professional degrees. Since the payment obligation is a fixed percentage of income, the payments automatically adjust during low-income periods.
An example of the MyRichUncle education investments was established by philanthropist Michael Robertson where he established a non-profit foundation to fund students at UC San Diego.
It is difficult to compare MyRichUncle with student loans, because the student is under no obligation to repay the original investment and does not pay interest on the principal. Instead, the student pays a fixed percentage of their post-graduation income for ten years. Once the ten year period is up, the student is under no further obligation, even if the amount repaid is less than the original investment. However, using reasonable assumptions about a student's earning potential, the cost of the MyRichUncle funding appears to be somewhere in between the cost of federal education loans and private alternative education loans. Cost is defined as the difference between money paid by the student and money received by the student on a net present value basis. This means that MyRichUncle is competitive with private alternative education loans. Note that private loans often require a parent to co-sign the obligation, while MyRichUncle does not. MyRichUncle also seems to be in the same ballpark costwise as the income contingent repayment provision of federal students loans, if one assumes the historical average Stafford loan interest rate.
Not all students who apply will receive funding.
MyRichUncle also offered private education loans that do not require a cosigner.
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