In February 2003, the Vancouver Sun printed an editorial entitled, "Equity contracts a student loan solution." In this article, the paper identified the affordability of post-secondary education as an important issue. It argued that a potential solution is to use "human capital contracts," which are equity-like private financial instruments.
The editorial described these contracts thusly: "Under a human capital contract, a student will receive funding and, in return, will have to hand over a predefined percentage of his or her income during a fixed period of time ... like an equity investment... the investor's rate of return will be a function of the earnings of the student, not a predetermined interest rate as in a student loan. As a result, students will face a much lower risk of going bankrupt [and] financial risks will be transferred to a private entity... ."
Required:
Applying concepts from financial accounting theory, discuss the pros and cons of "human capital contracts."