Student-loan twist: you owe if you earn

The binding contracts don't let students pay off the loan early as with traditional financial aid, Mr. Redd says. "We've done the math. You pay at least twice as much."

Federally subsidized student loans currently have interest rates of 3.46 percent, the lowest at any time. Some also have income-contingent options, which let graduates increase their repayments gradually as their financial situation improves. Even private bank loans currently have competitive interest rates that hover around 4.5 percent to 6.5 percent.

Redd suggests that educational investments such as MyRichUncle "take advantage of students who are not knowledgeable about traditional financial aid," or who are "desperate to just get any funds to stay in college."

Unfortunately, this desperation is an increasing problem as college costs skyrocket and federal student aid programs stagnate.

The funding gap hits freshman and sophomores especially hard, explains Jerry Ditto, a financial-aid counselor at Western Michigan University in Kalamazoo. Federal loan limits for underclassmen are $2,625 per year. "That doesn't even pay tuition at a low-cost institution," Mr. Ditto says.

Private lenders and banks have stepped in to fill the void in recent years with a host of alternative loans that mirror federal loans, including deferred repayment plans. "Over the past three or four years, our loan volume in those types of loan programs has tripled," Ditto says. "The loans work very well."

But organizers of MyRichUncle and REEF - the only two known groups currently offering such investment plans - counter that their financing model is competitive, and only seeks to fill the gap where traditional loans and grants leave off.

REEF founder Mr. Robertson contends the investments offer more peace of mind than private bank loans, which come with interest rates that could rise dramatically in the future. "There is a lot of uncertainty in the student loans because they're adjustable," says Robertson, also founder of the Internet music site www.MP3.com. "You could end up paying more, you could end up paying less."

But he also believes that both the investment and traditional loan models are not so different. "They're not giving out the money purely for altruistic reasons," Robertson says of the traditional loans. "They want a return on their money, too."

Under one hypothetical example given by MyRichUncle, an MBA student receives a $10,000 investment and agrees to pay 2 percent of his or her gross income for 10 years.

If the student makes $50,000 in the first year and the salary grows by 3.5 percent each year, the graduate would have to pay the investor a total of $11,731 by the end of the payment period. If the MBA student made $400,000 in the first year and saw the salary grow 3.5 percent each year, the payback would be $93,851. By contrast, a 9 percent private loan on that $10,000 pays out $15,201.

Ideally, Khan and others say, the investment model could unleash billions of dollars in capital that now is tied up in institutions rather than individuals. "One of the things that our for-profit investors realize is that you're a lot better off investing in people than companies," says Khan. "Most of the value created in America is not from machines and technology, it's from people. Companies can afford to go bankrupt, people can't."

While only about 65 students received loans in 2001 through MyRichUncle - and a dozen more through REEF last fall - both organizations say there is "tremendous interest" in the programs.

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