At least so says a new “Human Capital Score” calculator designed by People Capital. The score is intended to offer an alternative credit rating for college students seeking private loans to finance their education. As opposed to the traditional FICO score – a measure of past credit performance, which many students haven’t developed or don’t have a high enough one for private lender standards – the “Human Capital” rating is meant to measure future income potential.
What’s a student worth?
The calculator asks for basic transcript information, including test scores, GPA, and high school and college names. People Capital says its historical data sets on income trends for these various factors can offer a range of salaries the grad will likely earn for up to 10 years after school. But is this really reliable?
Financial aid expert Mark Kantrowitz says it can be. “They are clearly fuzzy factors, but you can translate fuzzy factors into a quantifiable measure of risk,” says the publisher of FinAid.org and FastWeb.com, which offer information on scholarships and student aid. But he adds that it will take several years of looking at students’ actual repayment rates under this setup to know if it works.
Basing loan terms on graduates’ earning potential isn’t completely new — the now-defunct MyRichUncle.com used majors, GPAs, and college reputations to assess credit risk, according to Kantrowitz. But People Capital’s plan to pair income projections with a peer-to-peer lending scheme is new.
People Capital plans to use this calculator as a measure of credit risk to match lenders and borrowers on a social-lending platform, meaning that a traditional financial institution isn’t involved. Lenders will bid on making student loans by offering competing interest rates, according to Alan Samuels, chief product officer at People Capital.
Traditional lenders get stricter
Students are increasingly borrowing from private lenders. According to the Project on Student Debt, 14 percent of undergraduates nationwide took out private loans in the 2007-08 school year, up from 5 percent just four years earlier. Traditional private lenders have already become more stringent on credit standards for the upcoming school year, according to Kantrowitz; for example, he says a FICO score of 620 would have been acceptable for a potential borrower before last July, but a 650 to 730 is expected now. The recession also means that some students this year won’t be fortunate enough to have a parent as a creditworthy loan cosigner, Samuels adds.
It’s too early to have data on how the recession will affect how much students take out in private loans this coming school year, but Kantrowitz says that “almost certainly there’s going to be growth.”
Peer-to-peer lending is still in its “infancy,” he adds, though current liquidity constraints on traditional private student lenders could spur demand for it. “That suggests peer-to-peer lending may show up as a last resort for people who can’t get private loans ... and want something other than credit cards.”
If you don’t need a loan
Samuels says the site hopes to have its platform to pair up lenders and borrowers ready in time to make loans for the upcoming fall semester. The calculator has been up since January, and in the meantime, showing young people their earning potential to help get them loans isn’t the only way it can offer financially jittery students a reprieve.
“Some people will be glad to see they're doing great relative to their peers,” he says.
– Guest blogger Taylor Barnes is a Monitor contributor.