My dad grew up in India attending a one-room school where students sat on a mud floor. Education eventually changed the trajectory of his life, whether that was the work he could pursue, where he could live, or, eventually, the opportunities available to me. I grew up knowing this story, so I have never really needed much convincing that education can change a person’s circumstances. What I had thought much less about was why something capable of creating so much value remains so unevenly financed around the world.
From Education to Infrastructure Finance
I started thinking more seriously about that problem during my first year at Harvard. A course I took on human rights introduced me to a wide range of humanitarian and development challenges, but it also left me frustrated by the limits of the institutions trying to address them. Governments have finite budgets and competing priorities, while foreign aid can fluctuate with politics. Particularly, nonprofits can do valuable work while, unfortunately, operating with resources far smaller than the problems they are trying to solve. Education seemed to illustrate this problem particularly well. Its benefits extend beyond the student receiving it: more education can raise earnings and employment, but it can also contribute to productivity, tax revenue, health, and economic growth. Yet many developing countries still struggle to finance education and workforce development adequately.
Curiously, my route into that question was through understanding how infrastructure is financed. Over winter break, I worked as a policy researcher at Indy Economic Development (City of Indianapolis), where I began learning how cities finance major public infrastructure projects. I had generally thought of roads, airports, utilities, power systems, and similar infrastructure as things governments built through taxpayer funding. Instead, I began seeing how much private capital now flows into them and became curious about how this has happened.
Historically, governments did finance much of their infrastructure directly. Over time, public-private partnerships, or PPPs, created ways for governments and private firms to share responsibility for financing, building, and operating individual projects. Later, specialized infrastructure funds allowed professional investment managers, known as general partners (GPs), to raise money from pension funds, insurance companies, sovereign wealth funds, endowments, and other large institutional investors known as limited partners (LPs). Those institutions need to invest their enormous pools of savings so that the money grows over time—for example, so a pension fund can meet future payments to retirees. Rather than finding and evaluating individual toll roads or power plants themselves, LPs can invest in a fund run by a GP that specializes in infrastructure, combines many projects into a portfolio, and manages those investments on their behalf. If the investments perform well, the institutions earn returns on the money they contributed, while the GP earns management fees and typically a share of the investment profits. Infrastructure eventually became what finance calls an “alternative asset class”: a recognized category, alongside areas such as real estate and private equity, in which large institutions routinely invest. I wanted to understand how that transition to scale had happened.
What’s more, the further I looked into infrastructure finance, the more interesting the comparison with education became. Both require substantial investment upfront, while many of their benefits arrive years later and extend beyond whoever provides the money. Yet one had developed into a major destination for private capital while the other remained financed primarily through governments, families, loans, aid, and philanthropy. Why?
That question became the starting point for my Laidlaw research. Could any of the ideas that helped private investment in infrastructure grow at scale also apply to the education, skills, and productive capacity embodied in people—in other words, “human capital”?
Income Share Agreements and My Research Questions
Investing in a road is relatively easy to understand; the investor can receive revenue from tolls, user fees, or government payments. But if an investor pays for someone’s education, how does that investment generate a financial return? Most of the economic value created by education shows up later, particularly through the person’s future earnings. I therefore started looking at financing arrangements that could connect the cost of education today with some portion of those earnings in the future. That brought me to income share agreements, or ISAs.
Suppose you needed $100,000 to pay for your education. With a conventional loan, I could lend you the $100,000 and you would later repay the principal plus interest according to a schedule. If your career turned out much better or worse than expected, you would still owe the debt. With an ISA, I would instead provide the $100,000 in exchange for an agreed percentage of your future income for a limited number of years. If you earned less, you would pay less; if you earned more, you would pay more. Some of the uncertainty about whether the education ultimately paid off would therefore shift from you to me.
Versions of this arrangement have actually been tried at a small scale with varying levels of success. Yale experimented with an income-linked tuition plan beginning in the 1970s. More recently, Purdue University offered “Back a Boiler,” through which participating students received education funding in exchange for a percentage of future earnings rather than taking an additional conventional loan. Lumni, a company co-founded by economist Miguel Palacios, has used income-linked contracts to finance students in several countries. These experiments showed that the basic contract could operate in practice, but none produced anything resembling the institutional market that now surrounds infrastructure. That made me wonder whether the ISA itself was only one piece of what was missing. Individual ISAs are a risky investment: their returns depend heavily on the unpredictable earnings of a single person. Infrastructure addresses a similar problem by pooling many individual projects (PPPs), which made me wonder whether combining many ISAs could similarly reduce individual risk and create more predictable returns for investors.
My first research question grew out of that gap: could ISAs plausibly provide the contractual foundation for a larger institutional market in human capital, and could infrastructure’s history tell us anything about what would need to develop around them?
Even if investing in human capital became commercially viable, there would be no reason to assume that private investors would automatically finance the students or countries where education has the greatest social value. Imagine that you manage retirement money and I offer you an investment in a country with political instability, incomplete financial records, and uncertain regulation. I can tell you that the investment could have tremendous social benefits, but that does not make those risks disappear. If you are responsible for someone else’s pension, a safer investment elsewhere may still be much more attractive.
Infrastructure finance has spent decades dealing with versions of this problem. Development finance institutions, or DFIs, can use public or development-oriented capital to take risks that ordinary commercial investors may not accept on their own. A DFI might guarantee part of an investment, insure against political risks, invest alongside private capital, or agree to absorb an initial share of losses if a project performs badly. Blended finance as a general concept uses the same broad logic by combining public, philanthropic, and commercial money whose providers are willing to accept different combinations of risk and return. Outcomes-based financing approaches the problem differently: if a program creates social value that a private investor cannot collect directly, a government or another organization can agree to pay when a measurable outcome is verifiably achieved.
In any case, my second question was therefore conditional on the first. If an institutional market in human capital were feasible, could mechanisms like these help extend investment toward underserved populations and emerging markets rather than only toward the easiest students to finance?
Testing the Idea: Modeling and Expert Interviews
I spent the summer approaching those questions through a literature review, quantitative modeling, and two expert interviews. As I read more, my analogy had to become more nuanced. Infrastructure and human capital share important characteristics, but investing in people raises distinct challenges; for example, income-linked contracts raise regulatory and ethical questions that physical assets do not. Any such market would have to ensure that the person themselves could never become the asset, only a limited contractual claim tied to a portion of their future income. Such differences did not undermine my comparison, but they made me more careful about which lessons from infrastructure finance could reasonably carry over to human capital.
For the quantitative part of the project, I tested whether pooling many human-capital contracts might change their financial behavior. I used the National Longitudinal Survey of Youth 1997, a federal study that has followed the same group of Americans from adolescence well into their careers. After cleaning the data and identifying respondents for whom I could construct sufficiently complete ten-year earnings periods, 5,933 of the original 8,984 respondents entered my final simulation.
I converted their observed earnings histories into hypothetical ISA payment streams. I first tested contract terms drawn from existing ISA literature and practice, but when applied to the NLSY97 sample, those terms did not repay the investor’s initial investment on average. That result was useful in itself; importantly, pooling could make returns more predictable, but it could not fix contract terms that failed to repay the original investment. To examine the effect of pooling without that issue getting in the way, I ran a second, illustrative contract designed to return roughly what the investor initially put in (“break-even”): $10,000 of financing in exchange for 8 percent of annual income above $25,000 for ten years, capped at $20,000 in total repayments. I then repeatedly simulated portfolios ranging from 10 to 1,000 of these contracts.
I tested four characteristics that could make these portfolios more attractive to large institutional investors. First, annual payments became much easier to predict as portfolios grew: unusually high or low earnings from any one person mattered less when hundreds of other contracts were included. Second, the risk of getting a very different overall result depending on which people happened to be in the portfolio fell sharply. The standard deviation of the investor multiple (total repayments divided by the initial investment) fell from about 0.23 with ten contracts to 0.02 with 1,000, a reduction of roughly 90 percent. In practical terms, pooling made the investment far less dependent on the earnings of any one person.
Third, pooling reduced risk but did not create better (or worse) returns. The contract drawn from the literature remained below break-even even as the portfolios grew, while the illustrative contract remained around break-even. A larger pool could therefore make returns more predictable, but the contract itself still had to generate enough repayment to be financially viable (indicating room for improvement vis à vis developing effective terms for these contracts). Finally, payments remained spread across the full ten-year period: about 46 percent arrived in years one through five and 54 percent in years six through ten. Although much shorter than many infrastructure investments, the ISA portfolios still produced a sustained stream of payments rather than one concentrated in the early years.
Taken together, these results suggested that pooling individual ISAs could produce several of the financial characteristics that would matter if large institutional investors were ever going to treat them as one.
There are also several things I would still like to test. The NLSY97 contains educational-attainment data that I did not use in this first model because applying a common contract allowed me to isolate what pooling itself accomplished. A real investor would know much more about the people being financed and would almost certainly use that information. Before the Global Laidlaw Conference in November, I hope to compare portfolios across educational groups and examine whether different compositions or contract terms change their risk and expected payments. I would also like to compare simulated ISA returns with stocks, bonds, and broader economic indicators. Alternative assets are often valuable partly because their returns do not move closely with traditional investments, so they can help reduce risk across an investor’s overall portfolio. My current model demonstrates diversification within an ISA portfolio; it does not yet show whether human-capital investments would provide that broader diversification benefit.
The expert interviews showed me why the quantitative model could answer only part of the project. I spoke with Miguel Palacios, whose academic work focuses on human-capital contracts and who co-founded Lumni. I expected much of our conversation to concern funds, pooling, and securitization. Instead, Palacios kept returning to the maturity of the underlying market.
His comparison with infrastructure made the point clear. Someone evaluating a toll road today can draw on decades of performance data, established contracts, and legal precedent. ISAs have nothing comparable in scale. Palacios described early investors in unfamiliar markets as financial “cowboys,” willing to accept uncertainty that a pension fund managing someone’s retirement savings cannot. Before an investment can move from those early risk-takers to, as he put it, “your grandmother’s pension,” investors need enough experience to understand and price the risks.
This complicated one of my original assumptions. I had initially seen funds and securitization as ways to create scale. Palacios made me reconsider the sequence: perhaps those structures may only become viable after years of repayment data, legal precedent, and investor experience have given the underlying market time to develop.
My second interview with impact-investing practitioner Alex Cortez focused more on incentives. For any financing model to grow, it has to offer each participant a reason to take part; creating social value does not necessarily give a private investor enough reason to accept greater risk.
That helped clarify the role that development-finance mechanisms might play in my project. My interviews may not have established that DFIs or blended finance were the answer, but they helped identify the problem these tools could address. If investors consider certain students or markets too risky, public or philanthropic capital could absorb some of that risk and make private investment more attractive. Similarly, if education produces benefits such as higher employment or tax revenue that investors cannot capture themselves, outcomes-based financing could allow governments to pay when those benefits are verifiably achieved.
What the Project Changed for Me
The project also changed how I think about finance itself. Before this summer, my impression of the field was shaped largely by its most visible forms in investment banking, trading, private equity, and the pursuit of financial returns. I tended to think of development and public policy as separate interests from these. What I had perhaps overlooked was the enormous scale of private capital already managed by pension funds, insurers, banks, sovereign wealth funds, and other institutions and the expertise those institutions already have in evaluating risk and financing long-term investments.
That’s quite crucial given that development is so often constrained by a lack of funding. Governments, aid agencies, and philanthropies cannot meet every need, while vastly larger pools of private capital exist elsewhere. That money cannot simply be redirected toward social goals, of course; investors have legitimate obligations and return requirements. The more interesting question, I realized, is whether public and private institutions can work together to make worthwhile investments possible that neither would finance as effectively alone. Rather than treating public and private finance as competing alternatives, I began to see how each can sometimes make the other more effective.
Before this summer, I was not sure finance was a field I could see myself in. I associated it too strongly with profit for its own sake and optimizing returns in ways that felt distant from the kinds of social problems I cared about. Now, I have begun to see finance and economics less as ends in themselves and more as tools. The same skills used to structure a private investment can also be used to finance a hospital, expand infrastructure, support education, or bring capital into places that governments and nonprofits cannot fully reach on their own. Tools are not inherently ethical simply because they can be used for social good. In my view, what matters is who is using them, toward what purpose, and under what constraints. For me, ethical leadership in finance therefore means taking responsibility for those choices rather than treating financial return as the only measure of a successful decision. I no longer see finance as a field separate from impact, but rather as one of the ways impact can be pursued (or ignored) depending on the choices people within the field make.
I am increasingly interested in infrastructure, sustainable development, impact investing, blended finance, and the broader space where investment and public policy meet. For my Leadership-in-Action project next year, I am considering working with an organization that advises blended-finance transactions in developing countries or one that develops and finances long-term public infrastructure in emerging markets.
We are not starting from nothing. We have spent generations building institutions capable of moving enormous amounts of capital around the world and becoming remarkably sophisticated about how to finance things we believe will produce value in the future. My project began by asking whether some of what those institutions learned from financing physical infrastructure could apply to human capital. I still think that comparison is one worth pursuing, but I no longer expect education to nearly follow infrastructure’s path.
The broader possibility is more interesting to me anyway: some of the capacity needed to address large development problems may already exist in institutions we do not instinctively think of as development institutions. My dad’s experience is part of why I came to this project caring about education and what it can make possible. Of course, my summer did not change that conviction, but it informed how I think about acting on it. I leave much more interested in how the capital and institutions we already have might be used to expand those opportunities for more people.
Abstract:
Human capital—people’s education, skills, and productive capacity—is one of the world’s largest yet most persistently underinvested forms of capital. Although income share agreements (ISAs), which finance education in exchange for a share of future income, have been proposed to mobilize private investment, previous efforts have remained limited in scale. By contrast, infrastructure developed into a major alternative asset class through institutions and financing mechanisms that transformed individual public-private partnerships into investments suited to institutional capital.
Drawing on this evolution, this project asks whether ISAs could similarly form the contractual basis of a human capital asset class and what complementary mechanisms could direct investment toward underserved populations in emerging markets.
The project combines a three-part mixed-method approach. The literature review examines how infrastructure evolved into an alternative asset class and applies those insights to human capital. Using longitudinal education and income data, the quantitative analysis constructs portfolios of simulated ISAs; results suggest that diversified ISA portfolios exhibit characteristics associated with institutional alternative asset classes, supporting the financial feasibility of human capital investing at scale even though today’s market remains immature. Expert interviews suggest that market maturation would depend on establishing the legal and regulatory foundations necessary to build institutional trust, as well as aligning incentives across market participants. They also indicate that blended finance, outcomes-based contracting, and cross-subsidization could reduce early-stage risk and encourage institutional participation, particularly in emerging markets.
This novel framework could inform mixed financing models for educational institutions and lay the groundwork for ISA-backed securities that enable capital recycling and broader institutional participation. It could also help governments improve the efficiency of public expenditure through market-based financing and provide developing countries with new mechanisms for attracting private investment toward education and workforce development.
