College tuition costs have rocketed up over the past decade and experts expect education costs to continue their upward trajectory over the next 20 years. So, what's a student or parent to do?
Enter crowdfunding. Students and families are beginning to turn to crowdfunding to pay for their college and graduate school educations. Instead of finishing school and entering the workforce saddled with hundreds of thousands of dollars of student debt, crowdfunding is helping people pay in full for college by spreading the costs among numerous contributors all over the world.
Why Someone Would Invest in Another Person's Education
In some cases, crowdfunding donors are willing to help out with college costs because they are friends or family members. Knowing the student and their family, they understand the circumstances and are willing to chip in. It can be hard to ask Uncle Jake face-to-face if he is willing to fork over a thousand dollars for textbooks. Crowdfunding offers a less stressful tool for requesting and giving support. But why would perfect strangers choose to help you pay for your bachelor's degree? They do so, not out of sheer altruism, but because you are offering them a reward for their investment. And that's the catch.
The "Human Capital Contract"
If you're going beyond friends and family for funding, you may need to turn to something called a "human capital contract." With a human capital contract, you are binding yourself to pay a percentage of your ongoing income to multiple strangers, often for as long as ten years. Contracts may, for example, bind you to pay back 10 or 20% of your income over a certain amount for years to come.
Depending upon what you wind up doing for a living, your investors may do very well or very poorly. Obviously, investors are gambling that you'll land yourself a terrific, high-paying job. If you ask yourself, is a college education a good investment? Warren Buffett has often quipped, before audiences of business-school students, that he would pay $100,000 for 10% of a student's future earnings. Companies like Upstart and Pave are making that happen.
Is it a good idea to bind yourself to pay out a portion of your income for the next ten years? The fact is that, if you're borrowing money to pay for college, you'll do that anyway. The difference is that with a bank your interest rates will be set (as opposed to being based on your income), and you'll be paying out to a single institution rather than to multiple individuals. In either case, there are legal requirements connected to the contract through a relatively new law called the Crowdfund Act.
The question of whether crowdfunding is right for you will depend upon the amount you expect to make, and your comfort level with the idea of hiring yourself out as "human capital."
Here are some great crowdfunding sites you can use to crowdfund your higher education expenses.
GoFundMe bills itself as the #1 personal crowdfunding site and has raised over $250 million for all kinds of reasons. Education is a big category on GoFundMe as numerous students and parents crowdfund money to pay off those pesky tuition payments.
In the US, tax-advantaged 529 plans have been used to save for college costs. Use GradSave to crowdfund your child's college account by sharing your project with friends and family. The site claims over 11,000 educational crowdfunding projects.
Upstart is one of a couple of crowdfunding sites that brings a fresh approach to paying tuition. In return for contributing to a crowdfunding campaign for a particular student, contributors get paid a portion of a student's future earnings for a fixed period through a "human capital contract." In addition to future payments, crowdfunders provide valuable mentoring to the people they back on Upstart.
Instead of graduating with hundreds of thousands of dollars of student debt, students can choose to use Pave to fund college and graduate school. When a student crowdfunds on Pave, they agree to pay out a percentage of their future earnings to backers of the campaign. Human capital contracts have been discussed in academic circles as a better way to fund educations -- now with Pave and Upstart and crowdfunding, they're becoming a reality.
Scholarmatch caters specifically to lower-income students in the San Francisco Bay area. Donors are usually beneficiaries of college aid who want to pay back the community by providing a similar service to other young people. In addition to helping with the process of finding funds, Scholarmatch also provides financial counseling to families. In some cases, families start their relationship with Scholarmatch when their children are in seventh grade.
Is Crowdfunding the Best Way to Pay for Your Education?
Crowdfunding has proven to be a valuable tool, enabling families to raise small amounts of money from numerous contributors all over the world -- all interested in helping an individual pay for college. Before jumping in, however, it's important to carefully review the laws surrounding this type of funding. To whom will you owe money? How much are you likely to have to pay out over how much time? Do your research and make careful comparisons before taking the leap.