A new credit scoring tool released by People Capital may provide a better measure of the creditworthiness of students.

Developed by peer-to-peer loan platform company

Here at Auto Credit Express, we realize that some of the most difficult customers to finance are those individuals that have a thin credit file. This is because most existing credit scoring tools, such as FICO, require a fairly extensive credit history in order to assure accuracy. Those people who fall within this definition, due either to age (too young) or other circumstances (cash buyers with no established credit history), are said to be “underserved” under the current credit system.

A new scoring system, developed especially for students and called the Human Capital Score™, has been released in beta form by People Capital, a company that, beginning in the 2009 academic year, will begin operating a peer-to-peer loan platform for students seeking financial aid. The company made its announcement today in the following press release:

NEW YORK -- People Capital, developer of an innovative peer-to-peer student loan platform, announced today that it had launched the next generation of its Human Capital Score(TM) (http://www.humancapitalscore.com/), a model that provides a more appropriate measure of the creditworthiness of a student. Built on research developed at The Wharton School of the University of Pennsylvania Insurance Department, the Human Capital Score uses academic merit data such as GPA, standardized test scores, college and major, along with traditional demographics data and normative metrics, to give insight into each borrower's future earnings potential.

"Students have long been disadvantaged by the current lending practices based on FICO scores and parental guarantees," said Thomas Shelton, Founder and CEO of People Capital. "People Capital seeks to unlock the credit markets for student loans by providing transparency and insight into a student's potential. Specifically, what is relevant is a student's future income potential. Through the Human Capital Score we make it possible for lenders to evaluate and rank students according to the likelihood that a student's income may reach a certain threshold in a given year, or that his/her average income might reach a certain threshold in the 10 years following graduation.

"Our Human Capital Score is far more appropriate than credit scores in the current economic conditions," continued Shelton. "Traditional credit scoring models are based on historical data on defaults and credit attributes, e.g., debt outstanding, number of credit cards. Such traditional models do not seek to understand why, or how, there is a link between such attributes and default, and are heavily dependent on historical data. When conditions change, these old models are no longer helpful. The Human Capital Score uses both academic and credit data to generate a rank ordering of students' ability to pay. We project possible earnings paths for borrowers given a set of attributes (e.g., major, school, SAT). Through these earnings projections, we can create a rank ordering of individuals based on the sufficiency of projected future income to pay off a loan. The Human Capital Score would adjust projected earnings profiles to reflect changes in economy as a whole. By looking at potential future incomes, a lender can evaluate available cash flow to determine whether they were just barely sufficient to make their debt payments, or those who could do so easily. When economic conditions are bad and incomes fall, the group with more future disposable income is likely to default at lower rates than the borrowers who have little flexibility."

People Capital is also developing a peer-to-peer lending platform that will offer a unique solution for students to finance their college educations. This platform is poised to provide funding for students in the 2009-10 academic year.

The Bottom Line

Especially in uncertain economic times, students and parents need as many opportunities and as much flexibility as possible when it comes to paying for a college education. Kudos go to People Capital for their efforts at helping all students achieve their goals.