New student loan program estimates future earnings

calculator personIn an effort to provide more data for student lending decisions, a company called People Capital has released a new "Human Capital Score" calculator. By providing your SAT scores, college major, and the name of the college you're attending or planning to attend, the calculator will spit out a number (and a range) of what you can expect to earn after you graduate.

The score is still in beta so it's strictly a novelty for now, but the ultimate plan is for the score to be used by private loan providers looking to decide how much they can prudently lend to college students.

Students and their families should be extremely wary of this service -- It may be useful enough on average that student lenders can improve their underwriting decisions with it, but you would have to be on more drugs than Michael Jackson the day he died to borrow money for college based on earnings projections. Although making loan money available based on choice of college and major might be a winning strategy for lenders, there is so much variation within those groups that students shouldn't take out money based on either of those factors.
In the FAQ section of the website, People Capital writes that "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."

What's wrong with this statement? A large percentage of people embark on career paths that aren't related to their majors. Are you working in a field that's directly related to your area of study as an undergrad? Research suggests that only 55% of college graduates land jobs related to their majors. And even if a student does take a job related to his major, there's a good chance that major will change before he graduates!

Many college financing experts suggest that students borrow for college based on their anticipated earnings. This is an absolutely, horrifically bad idea. First, no one can predict what the demand for college graduates will be in four years, and most students may want to pursue different careers by then anyway. College should be about opening doors and creating opportunities -- not chaining students to the highest paying jobs they can find upon graduation so they can service student loans they thought would be prudent when they were 18 years old.
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