Education as an Investment. Really

["Harry Veeder" <eo200@xxxxxxxxxxxxxxxxxxx>]

>From the New York Times
http://www.nytimes.com/2002/01/06/technology/06RICH.html?todaysheadlines

January 6, 2002
Education as an Investment. Really.
By AARON DONOVAN

With tuition rising faster than inflation, and returns on many investments
still in reverse, parents of prospective college students are facing some
serious choices. Should they cash in their mutual funds now? Seek loans or
grants? Ask a wealthy relative for help in paying?

Now a Manhattan company, Iempower, which started two years ago, has
developed an alternative method of paying for college. Through its Web site,
www.MyRichUncle.com, Iempower is working to match students with a network of
well-heeled investors ? sort of like wealthy relatives. The investors
provide money to pay for undergraduate or graduate degrees; the students
agree to pay a fixed percentage of income for a set period after graduation.

But are people willing to invest in authority-questioning, baggy-pants-
wearing college students, whom they don't even know? So far they have, said
Raza Khan, who founded Iempower with Vishal Garg. The men attended
Stuyvesant High School and New York University together.

In the last year, Mr. Khan said, Iempower has received $750,000 from
investors, while 1,000 students have applied for aid and 65 have received
it.

Mr. Khan says Iempower decides whether to offer assistance, and at what
rate, based on students' grade- point averages, standardized test scores,
employment experience and career goals. The company analyzes the data using
actuarial principles that it calls an evaluation engine.
The repayment rates vary. For undergraduates, they start at 0.2 percent for
each $1,000 of earnings for a period of up to 15 years. Rates for graduate
students start at 0.1 percent per $1,000 for up to 10 years. The maximum
repayment rate is 0.4 percent per $1,000. All students also pay a one-time
service fee to the company of 2.5 percent. It is deducted from the amount
borrowed.

The company says it caps the aid amounts so that no one pays more than 15
percent of his or her future earnings. Once the students graduate and are
employed, Iempower asks them for monthly income filings and for tax returns.

So are these loans better than conventional student loans available through
banks or from the federal government? It is a judgment call for each
student, because the actual repayment will not be known until graduates are
well into their careers. In theory, students using MyRichUncle could fall
victim to their own success ? the more they earn, the more they will have to
pay back. For students, the most widely used loan right now is the federal
Stafford Loan program; the interest rate is currently 5.39 percent.

Mr. Khan says his business tries to provide both a good return for its
investors and a financial aid option to students who cannot afford to pay
for college.

"What's incredibly exciting about this," he said, "is that it is one of the
few occasions where social ambitions and business ambitions are pursuing the
same goal."

But Mukund Krishnaswami, a managing partner of Revolution Capital, a venture
capital fund in Philadelphia and New York, has doubts about the program.

"For every 10 students, you have two or three who decide they're not going
to work, two who become social workers or priests, and you're not going to
make any money on them," he said. "But maybe you get one person who becomes
Bill Gates."

Mr. Krishnaswami said he considered starting a similar business after
graduating three years ago from the Wharton School at the University of
Pennsylvania, but abandoned the plans because he did not think the return
would be good enough.
 
Mr. Kahn would not disclose what investors could expect to earn, except to
say that "it's fairly competitive" with other investment options.

Mr. Krishnaswami said the students most prized by Iempower ? those with the
greatest earning potential ? may be the ones least likely to apply. "Anyone
who intends to make a lot of money," he said, "is probably going to take out
a student loan instead."

But Mr. Khan said students did not always have a clear picture of their
future earnings. "It's funny how many poets become investment bankers," he
said. "If you can spot value, the capital will move there."