Tokenize This: Week 7 ~ Tokenized College Tuition
Students get some breathing room, Investors get unique returns
We know college is largely seen as the ultimate investment in yourself. What if it can present itself as an alternative investment opportunity as well?
With the average college undergraduate student taking out over $30,000 in student loans and most falling between the $10,000-$25,000 range, hefty debt between the ages of 18–22 has become pretty normalized.
Given this sum, the rising tuition costs across the board, and the ever-changing prospects of the evolving workforce, the intrinsic value of a college education is constantly up for debate. Mix in the COVID virtual atmosphere (Zoom U) and people have even more reason to reconsider what they’re willing to spend on traditional education.
In fact, prospective college students are in a unique crosshair to begin exploring alternative sources of funding. One of which being an Income Share Agreement ushered in by blockchain technology and security tokens.
Let’s take a look at how tokenizing one’s college tuition and making repayments once fully established in the post-grad world can offer benefits to both students and creative investors alike.
Value Adds
Student (Token Issuer)
- Avoids stacking large sums of debt by opting for an Income Share Structure
- More flexibility throughout school and post-grad period, both financially and in regards to decision-making
- Wider range of educational choices since not limited to debt or credit restraints
Financier (Token Holder)
- Gets preemptive rights to add-on rounds for Graduate programs like Medical School, Law School, Masters in Engineering, etc.
- Access to a lowly correlated investment channel with different risk-reward scenarios
- Opportunity to fund students of all backgrounds and capabilities — more than just a monetary ROI (Socially Conscious Investing Opportunity)
As mentioned above, the higher the potential debt mounts, the more limited students may feel in their decisions. This goes for both the choice of college (ex. Accepted into their #1 school but unwilling to undertake the required level of debt) and professional choices (ex. Pressure to choose a higher paying short-term route over a longer-term vision out of necessity for making loan repayments).
Structuring an Income Share Agreement for students can yield improvements in both aspects, which may ultimately even have ripple effects into the rest of the economy. This post-grad income share concept can be viewed as a more specific spin-off of the $20k Human IPO that one entrepreneur launched in April 2020. Shoutout to Security Token Market’s own Jonah Schulman for drawing those connections.
Consider the example where a very bright and intuitive student has her heart set on joining a Biotech startup as soon as she finishes her undergraduate degree in Bioengineering. She can map out that it will take at least 3–5 years to begin reaping any rewards, but still sees the opportunity as an anchor in her professional vision.
This student could possibly drive the growth of this firm, and ultimately the betterment of society, given her predetermined decision and commitment to the vision. She would be fantastic to have on board.
The limiting factor is not her desire to work for this startup and defer monetary incentives — rather the limiting factor is her mandatory student loan repayments. After running the calculations, she realizes this startup role would not enable her to comfortably meet her loan requisites, and therefore pushes her to look at a larger firm with a higher salary but less innovation.
The breathing room she has is nonexistent. The startup route would lead to a more lucrative and fulfilled future, but her short-term limitations are the current priority. The opportunity cost of high student loans is immense, as I believe this scenario comes up more often than people would think.
What would offer this student more flexibility to pursue her vision (not passion — Vision) is an Income Share Agreement that defers her repayment requirements.
The agreement can be authorized and managed purely through security tokens. Savvy investors can back students of their choosing based on whatever criteria they deem fit. Whether it consists of traditional exam scores and grades, fields of interest, geographical and social connections, or future goals, investors may conduct their diligence just like any other investment opportunity.
Like all investment opportunities, the results cannot be perfectly pinpointed. No matter how much research and background screening is done, the asset (in this case, the student backs the asset) will perform as it performs. Take a look at a few examples below.
Sample Outcomes
- Base Case: Student performs as expected, lands a solid professional full-time position after graduation, does well and fulfills the terms of the contract
- Bull Case: Student strongly outperforms the expected scenario, lands a solid full-time position and gets promoted ahead of schedule, collects a bonus 3x the average. The student does well, fulfils the terms of the contract and can even retire the contract early at a premium (this saves him/her money in the remaining time frame, and still compensates the investor with a prepayment rebate)
- Bear Case: Student underperforms, struggles to land a role post-grad and settles for underemployment. It’s possible they rebound and recoup the terms of the contract, but may generate a lesser-than-expected return to the investor
Seeing these potential outcomes begs the question: What is the best structure for these tokens? To that we say the usual — security tokens can be structured in creative ways, and that’s the beauty of the technology.
In the Base Case, the student may want to make fixed payments for a decade until the full tuition is paid off + a predetermined interest amount (similar to a debt agreement, but no credit obligation). Another choice is to set a fixed percentage of monthly income in perpetuity — Low stress during school and ability to work diligently in the post-grad world without missing loan repayments.
In the Bull Case, the student would benefit from baking in an option to retire the tokens early at a premium, given that a fixed percentage of their income would be a pretty substantial amount thanks to the extraordinary bonus and early promotion. In protecting one’s own interests, the student could buy back the security tokens at a premium which would save future cash flows and still offer the investor a positive ROI.
Finally, in the Bear Case, a fixed percentage of income in perpetuity will likely be maintained. The investor will need to be patient for a longer term return, but of course there are no guarantees.
Ultimately the decision will come down to the student — would you rather make loan repayments on principal + interest beginning right after graduation, or buy yourself some breathing room and sacrifice a portion of cash flows during your post-grad life. There’s no one-size-fits all, and that’s what makes it exciting.
New Topic coming next Wednesday 3/3/21!
Disclaimer: This is not financial or investment advice and should not be interpreted as such. Please do your own research on investments and financial decisions before partaking in any ideas or ventures depicted in this publication.
