The New Futurism

This summer, Jordan Elpern-Waxman had a revelation. He’d quit his job in order to start a company that markets craft beer, and, as most new entrepreneurs do, he’d been paying for the whole thing himself. “I had gone through my savings and put everything on my credit card, and I woke up one morning and looked at the balance and said, ‘Holy shit, how am I ever going to pay this thing off?’ ” Elpern-Waxman told me. So he did something unusual: he sold off a share of his future.

He went to a new site called Upstart. Founded last year by former Google employees, it’s a crowdfunding marketplace where people looking to start a business, say, or pursue more education can raise cash from investors. In exchange, they pay some of what they earn over the next five or ten years—what percentage you have to pay is determined by how much you want to raise and by the Upstart algorithm’s assessment of your earnings potential. For thirty thousand dollars today, you might end up paying out, say, two per cent of your income for the next five years.

Economists call this kind of deal a human-capital contract. Such contracts sound like a libertarian fantasy—they were popularized by Milton Friedman—but they’ll likely become more common. Other companies, like Lumni and Pave, are doing similar things, and the demand is there, because the biggest challenge that young Americans face these days is debt. Student-loan debt is $1.2 trillion, thanks to the rising cost of college and dwindling state support for education. The average college graduate in 2012 owed twenty-seven thousand dollars in student loans, and people who go to graduate or professional schools usually owe far more than that. The average twentysomething owes forty-five thousand dollars. Getting the money to start a business, meanwhile, seems harder than ever. A Kauffman Foundation study found that almost sixty per cent of small businesses rely on credit cards to finance their operations.

For the young, borrowing against the future can make sense, because income usually rises with age. The problem is that most young Americans have fixed-payment debts; they pay back the same amount every month, regardless of how well they’re doing. That puts a lot of pressure on people to take whatever job is available, discourages them from investing more in education, and, as a recent study by the Consumer Financial Protection Bureau suggested, may deter risk-taking and innovation. “I saw a repeating pattern, where you had people just out of school who had something interesting and compelling that they wanted to do, but who were instead going to accept the job at Raytheon, or whatever,” Dave Girouard, one of Upstart’s founders, told me. “They weren’t excited about the new job, but pragmatically it was the right thing to do.”

Human-capital contracts provide more flexibility. If you’re having a good year, you pay more; if you’re struggling, or going to school, you pay less. In years where you earn less than a certain agreed-upon amount, you pay nothing, and the year is added to the end of the contract. This isn’t necessarily cheaper than traditional ways of raising money, but you’re less likely to get stuck with a payment you can’t afford. (At Upstart, the maximum you’ll pay an investor is seven per cent of your income, and the average is three or four per cent.) This makes it easier to take a risk on a new venture.

Upstart is still an experiment; fewer than a hundred people have completed funding so far. Critics argue that the idea is inherently flawed—that borrowers will hide their income or just take the money and slack off. And to some the concept seems uncomfortably close to indentured servitude. As Girouard puts it, “There is that gut reaction that says, Ugh, I don’t know about this.” It’s an understandable reaction, but the analogy is flawed: a share of your earnings isn’t a share of yourself. And you could say that young people are already indentured—to their student loans and to credit-card companies. There are precedents, too: Muhammad Ali’s early boxing career was funded by a syndicate of backers who paid for his training in exchange for a share of his winnings. Tournament poker players are regularly staked by investors. Creative work is often funded in a similar way. Publishers advance authors sums of money and take the vast majority of the profit until the advance is recouped.

Indeed, at root, a human-capital contract is what’s called an income-contingent loan: how much you pay back depends on how much you earn. And income-contingent student loans are becoming common. Australia’s higher-education system is funded by a special tax on graduates, pegged to how much they earn. The U.K. uses an income-based repayment plan. And, as of 2009, a sizable percentage of federal student loans in the U.S. became income-based, although tight eligibility rules and general confusion have meant that most student borrowers are still stuck in fixed-payment plans.

Upstart may succeed or it may fail, but the principle behind it is unlikely to disappear. This isn’t entirely a benign development. Income-based plans make it easier for students to repay their loans, but they also reinforce the idea that education funding is the responsibility of the individual rather than of the state. Still, on their own terms, they’re a step forward. The old way of borrowing was predicated on a world in which the job market was stable and everyone had a steady income. That world of work is changing. The way we finance it needs to change, too.

Original Article
Source: newyorker.com
Author: James Surowiecki