People Capital is revolutionizing student lending with a new credit risk methodology. For students - who have
short or no credit history - the FICO® score is unlikely to be an appropriate measure of credit risk. Our
Human Capital Score™ calculates future income potential by including variables such as GPA,
standardized test scores, college and major.
When you apply for a private student loan, lenders want to assess the risk they would take by making the
loan to you, so they can know what amount they should lend and at what interest rates. Lenders use a
set of standardized and verifiable attributes as a means of differentiating among student borrowers.
The most common form of credit score is the "FICO® score". (Learn more about FICO® scores).
FICO® scores are based upon such attributes as the number of credit cards you have, outstanding
balances, payment history and bankruptcy. Based on this form of methodology, students (or young adults in
general) will fare poorly, as they do not have a long (or even medium) positive history of payments.
As a result, they will generally receive low FICO® scores and, thus, will look like very risky propositions. This is
where the Human Capital Score™ comes in.
The starting premise for the Human Capital Score™ is that there is a way to assess the relative
riskiness of students by looking in part at a different set of standardized and verifiable attributes.
These attributes help predict their future income, and hence their ability to pay back loans.
These relevant attributes are items such as school, major, GPA, and standardized test score.
The Human Capital Score™ uses these as inputs to create a score.
You can try out The Human Capital Score™ Calculator at
www.humancapitalscore.com.
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Why hasn't this been done before?
FICO® scores are based on attributes that are easy to quantify and rank. More delinquencies
lower the score; a longer credit history raises the score. Evaluating student academic attributes
is not so simple. How do we know which schools or majors are more likely to correlate with the ability
to earn income and the capacity to repay a loan? We must collect, clean, and integrate additional
data about schools, majors and such. This requires expertise, time and dedicated resources.
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What insights does the Human Capital Score™ provide?
Future income projections for the 10 years post graduation
The Human Capital Score™ projects the possible income paths of college students in the 10 years
after graduation. This allows the classification of students into various risk categories which lenders can use to
consider the capacity of a given group of college students to repay loans of
long- and short maturities. The projected income shortly after graduation is a good indicator of
short term capacity to pay. Longer-term loans can be assessed by looking at predicted income over a
longer period. For benchmarking purposes, we provide a Human Capital Score™ for students for the period 2
years and 8 years post-graduation.
Ranges of the income predictions
Projections of the average future income should be considered with full understanding that it is a
computer based algorithm that uses historical data and a broad view of future economic conditions to
generate a result. As with any score that tries to categorize individual credit capacity, there is a
range of possible future results. The Human Capital Score™ offers broad ranking categories as well as
measures of ranges of possible income paths. This makes it possible to evaluate the likelihood that income
will fall below a certain threshold in a given year, or that average income will fall below a certain threshold
in the 10 years following graduation.
Scores tailored to specific circumstances
Not all loans are the same. There is a world of difference for a medical student between having to repay a
short-term loan within a few years of graduating from his or her undergraduate institution, and having to
repay a loan that has deferred payments not coming due until 10 years later. The next iteration of the Human
Capital Score™ will incorporate rankings that take into account specific loans. Therefore, students could receive
one ranking for a 3 year loan without principal deferment options, and another for a 10 year loan with principal
deferment options.
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How does the Human Capital Score™ deal with changes in economic conditions?
Traditional credit scoring models are based on historical data on defaults and credit attributes (e.g., debt outstanding, number
of credit cards, etc.). Attributes linked to low default rates in this historical data are given high scores; attributes linked
to high default rates are given low scores. Such traditional models do not seek to understand why, or how, there is a link between
an attribute (e.g., number of credit cards) and default, rather, they only reflect patterns and links from their historical data.
Instead of focusing on factors that predict credit default, the Human Capital Score™ uses both academic and credit data to project
future earnings potential. Our model identifies the set of earnings paths (around a projected average) possible for a borrower with
a given set of attributes (e.g., major, school, SAT score). Given these earnings paths, we can determine how often an individual is
likely to be able to generate sufficient income to pay off a loan. Because we model the reason why people might default (insufficient income),
the model is easy to adjust to projected changes in economic conditions, even to circumstances never seen before in historical data. When income
projections fall in response to changing economic conditions, the Human Capital Score™ will reduce income projections.
The Human Capital Score™ model differentiates between people whose earnings paths (under normal conditions) were projected to be often
just barely sufficient to make their debt payments from those whose income paths were projected to be more than sufficient. If changing
economic conditions reduce our income projections, this will reduce Human Capital Score™ more for the first group than the second.
This flexibility makes the Human Capital Score a superior tool for rank ordering students who, as a general matter have no significant credit
history – their ability to pay is directly dependent on their future earning capacity within a future economic context.
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Who can use the Human Capital Score™?
The Human Capital Score™ can be used by borrowers, such as college students and prospective college students. It can also be used by lenders, whether individual lenders or financial institutions.
Borrowers
College students, or prospective college students, can use their Human Capital Score™ to provide to lenders an
objective, third party ranking on their capability to repay loans. While the model uses inputs such as college,
major, GPA and standardized test scores, it also recognizes that not all students will have information on all
these attributes. For example, prospective students may be undecided on a major and, depending on their choice of
college, may not have needed to take any standardized tests. Even without all this information, you can receive a
Human Capital Score™. (Note: currently the system accepts the SAT
and ACT as standardized test options. In the future,
the Human Capital Score ranking will accept more standardized tests as well as additional fields such as
major GPA, etc. This additional data will be able to generate scores that will have increased ability to inform
lenders about your future creditworthiness.
Lenders
Individual lenders can see the Human Capital Score™ for each borrower on the People Capital peer-to-peer lending
site (coming soon). Or, they can use the Human Capital Score™ calculator to create a Human Capital Score™
for a potential borrower that does not already have one.
Institutional lenders who wish to use the Human Capital Score™ as part of their lending processes should contact
us at info@people2capital.com to discuss use of our API or XML link
that allows multiple scores to be calculated from uploaded files.
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On what scale is the Human Capital Score™ provided?
The Human Capital Score™ ranking scale uses 9 categories (1-9) with "+" and "-" to denote scores that are at the higher or lower
ends of the category. Currently, we provide a Human Capital Score™ for students for the period 2 years and 8
years post-graduation.
A score is an opinion of the likelihood that a borrower will have the capacity to generate sufficient income
at the end of the given period:
| 9 |
Highest |
6 |
Above Average |
3 |
Weak |
| 8 |
Very Good |
5 |
Average |
2 |
Very Weak |
| 7 |
Good |
4 |
Below Average |
1 |
Lowest |
+ indicates at the highest end of the range
- indicates at the lowest end of the range
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So how does the Human Capital Score™ work?
Built on research developed in The Wharton School of the University of Pennsylvania Insurance Department, the
Human Capital Score™ combines credit-risk tools and metrics with academic achievement information to generate
possible earnings and insight into each borrower's future creditworthiness.
The model driven calculation is based on statistical data on a large number of students. We know their majors,
schools, grades, scores, and a host of other attributes. We know how much these students earned in the years
after they graduated. We can use this information to create projections of income for students based on each
student's specific academic attributes. In overly simplistic terms, if students in our data who study engineering
and have good grades had high and growing incomes after graduation, the Human Capital Score™ will assign high
and growing incomes to engineering students with good grades who ask for a Human Capital Score™.
The Human Capital Score™ also incorporates additional information on how much students with various majors earn,
the attributes of the various schools, etc. This allows the model to make quality projections of the future
potential incomes of students, even when we don't have data on many (or even any) students who went to that
school or had that major. The score is not limited by the data provided by students who request a score.
Naturally, we can't get data on the incomes of students 10 years after graduation except from students who
graduated at least 10 years ago. To make sure the Human Capital Score™ reflects the most recent patterns in
graduates' incomes, we consider the most recent trends in the overall income distribution of college graduates
and adjust based on current economic trends.
Because we have individual-level data on many students, we can project both average likely income and the
range of possible income paths. Students from a given major and school may all have relatively similar incomes;
another major or school may have wide variation in graduates' incomes. The Human Capital Score™ will be able to
provide a variety of statistics relevant for repayment, not just expected income. The model can also estimate
the likelihood that income will fall below a certain value, or fall in the worst 10 percent group. We can compute
the probability that lifetime income will fall below a given threshold.
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What can't the Human Capital Score™ do (aka "the fine print")?
While the Human Capital Score™ calculates potential future income, and thus broadly estimates the ability to pay,
it does not measure the willingness to pay. If someone with a high income is unwilling to make loan payments, or
someone with no income still makes loan payments, this isn't captured by the model. Human Capital Score™ measures ability to pay,
not propensity to pay.
While the Human Capital Score™ ranks future income projections for college students in the 10 years after
graduation, we do not have a crystal ball. These projections are based on data about the incomes of people
who have already graduated from college and are working now. If economic conditions shift, we won't capture
that. Most obviously, if the current recession reduces the incomes of college graduates in the coming years,
our estimates of income will be systematically too high. That said, it will continue to show the relative
ranking of college students. So it will continue to show which students are relatively better options
than others.
The Human Capital Score™ can only project income using standardized attributes and ignores specific student
interests or plans. An engineering major from MIT with high scores and grades will have a high Human Capital Score™ because past
engineers from MIT with high scores and grades have on average enjoyed high incomes after graduation. If this
particular student plans to join the circus (no disrespect to this particular career path intended, just that it
traditionally affords a lower income level) after graduation, the Human Capital Score™ cannot, and does not
attempt to, reflect this. We are not able to reliably verify or validate information about a specific student's
work plans or expectations. We can only rely on information that we can verify.
The Human Capital Score and any income projections and ranges are solely as statements of opinion and should
not be construed as statements of fact. Human Capital Scores are not recommendations to buy, sell or hold any
security or to lend to any borrower. People Capital relies on information provided by borrowers and performs
only limited verification of this information. The use of the Human Capital Score™ should not be construed as
an endorsement of the accuracy of any of the data or conclusions, or as an attempt to independently assess or
vouch for the financial condition of any borrower.