Human Capital Score

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Human Capital Score

  1. 1. Human Capital Score ™ May 2009 This document contains trade secret information. Please be aware that no part of this presentation may be reproduced in any form or by any means, electronic or mechanical, including photocopying and recording, for any purpose without the express written consent of Quest Growth Partners, LLC (doing business as People Capital). In addition, due to the proprietary nature of Quest Growth Partners’ methodologies and other information enclosed herein, this presentation may not be shown to any third party without the prior written consent of Quest Growth Partners, LLC. For further information, contact: Al Alper, President People Capital 274 Madison Avenue, Suite 1400 New York, NY 10016 [email_address] Mobile: (917) 658-9008 Office: (212) 725-2295 x13 Strictly private and confidential visit us at: www.people2capital.com get your score: www.humancapitalscore.com
  2. 2. Agenda <ul><li>Background </li></ul><ul><li>How the Human Capital Score™ works </li></ul><ul><li>A worked example </li></ul><ul><li>Future developments </li></ul><ul><li>Next steps </li></ul>
  3. 3. Overview <ul><li>A revolution in credit risk assessments for students </li></ul>
  4. 4. People Capital is revolutionizing student lending with a new credit risk methodology <ul><li>The current credit risk metric, the FICO® score, is inappropriate for students </li></ul><ul><ul><li>It is based on credit payment history, and students have no such history </li></ul></ul><ul><ul><li>As a result, they will generally receive low FICO® scores and, thus, will look like very risky propositions </li></ul></ul><ul><li>The Human Capital Score™ assess the relative riskiness of students by looking at a different set of standardized and verifiable attributes </li></ul><ul><ul><li>E.g. school, major, GPA, and standardized test scores </li></ul></ul><ul><ul><li>These attributes help predict their future income, and hence their ability to pay back loans. </li></ul></ul>
  5. 5. How the Human Capital Score™ works <ul><li>Why hasn’t this been done before? </li></ul><ul><li>What insights does the Human Capital Score™ provide? </li></ul><ul><li>How does the Human Capital Score™ deal with changes in economic conditions? </li></ul><ul><li>What data was used to develop The Human Capital Score™? </li></ul><ul><li>Who can use the Human Capital Score™? </li></ul><ul><li>On what scale is the Human Capital Score™ provided? </li></ul><ul><li>So how does Human Capital Score™ work? </li></ul><ul><li>What can’t the Human Capital Score™ do (aka “the fine print”)? </li></ul>
  6. 6. Why hasn’t this been done before? <ul><li>FICO® scores are based on attributes that are easy to quantify and rank </li></ul><ul><ul><li>More delinquencies are bad; a longer credit history is good </li></ul></ul><ul><li>Ordering student attributes is not so simple </li></ul><ul><ul><li>E.g. How do we know which schools or majors are better and worse? </li></ul></ul><ul><ul><li>We must collect, clean, and integrate additional data about schools, majors and such </li></ul></ul><ul><ul><li>This requires expertise, time, and money </li></ul></ul>
  7. 7. What insights does the Human Capital Score™ provide? <ul><li>Predicted income paths of college students in the 10 years after graduation </li></ul><ul><ul><li>For “basic” users, we only provide a Human Capital Score™ for the period 2 years and 8 years post-graduation </li></ul></ul><ul><li>We calculate measures of uncertainty, to quantify the range of possible income paths </li></ul><ul><ul><li>Assess which students are more (or less) likely than others to follow a path </li></ul></ul><ul><ul><li>Predict the probability 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 </li></ul></ul><ul><ul><li>Only available to “premium” users </li></ul></ul><ul><li>Scores tailored to specific loans </li></ul><ul><ul><li>We are working to develop rankings that are tailored to specific loans </li></ul></ul><ul><ul><li>E.g. Different rankings for a 3 year loan without principal deferment options and a 10 year loan with principal deferment options. </li></ul></ul>
  8. 8. How does the Human Capital Score™ deal with changes in economic conditions? <ul><li>Traditional credit scoring models based on historical data on defaults and credit attributes </li></ul><ul><ul><li>E.g., debt outstanding, number of credit cards, etc. </li></ul></ul><ul><ul><li>Attributes linked to low default rates are given high scores; and vice-versa </li></ul></ul><ul><ul><li>Does not seek to understand why/how , there is a link between an attribute and default </li></ul></ul><ul><li>HCS identifies earnings paths for a borrower with a given set of attributes (e.g., major, school, SAT score) </li></ul><ul><ul><li>Because we model the reason why people might default (insufficient income), it is easy to adjust to projected changes in economic conditions </li></ul></ul><ul><ul><li>When income projections fall in response to changing economic conditions, HCS will reduce income projections </li></ul></ul><ul><li>HCS differentiates between earnings paths that make it tough to make debt payments from those projected to be more than sufficient </li></ul><ul><ul><li>If changing economic conditions reduce our income projections, this will reduce HCS more for the first group than the second </li></ul></ul>
  9. 9. What data was used to develop The Human Capital Score™? <ul><li>Multiple sources covering more than 100,000 individuals: </li></ul><ul><li>Integrated Public Use Microdata Series (IPUMS) of the 2007 American Community Survey from the U.S. Census. </li></ul><ul><ul><li>Income distribution of college graduates - over 100,000 college graduates. </li></ul></ul><ul><li>Baccalaureate and Beyond Longitudinal Study (B&B) </li></ul><ul><ul><li>Demographic, academic and employment information on recent college graduates - over 10,000 individuals </li></ul></ul><ul><li>Integrated Postsecondary Education Data System (IPEDS) </li></ul><ul><ul><li>Complete listing of post-secondary educational institutions and their attributes (e.g. graduation rates) </li></ul></ul><ul><li>Education Trust </li></ul><ul><ul><li>Other attributes (e.g., expenditure per student) on a subset of institutions </li></ul></ul><ul><li>U.S. News and World Report </li></ul><ul><ul><li>School ranking data </li></ul></ul><ul><li>National Association of Colleges and Employers (NACE) Salary Survey </li></ul><ul><ul><li>Information on college majors and subsequent income prospects - covers more than 15,000 job offers </li></ul></ul>
  10. 10. Who can use the Human Capital Score™? <ul><li>Borrowers </li></ul><ul><ul><li>College students can use their Human Capital Score™ (available at www.humancapitalscore.com ) to communicate to lenders about their ability to repay loans </li></ul></ul><ul><li>Individual Lenders </li></ul><ul><ul><li>Individual lenders will be able to see the Human Capital Score™ for each borrower on the People Capital peer-to-peer lending site </li></ul></ul><ul><ul><li>They can use the Human Capital Score™ calculator to create a Human Capital Score™ for a potential borrower that does not already have one </li></ul></ul><ul><li>Institutional Lenders </li></ul><ul><ul><li>Institutional lenders (that might have hundreds, or thousands, of individuals to create scores for) can use our API or XML link that allows multiple scores to be calculated from uploaded files </li></ul></ul>
  11. 11. On what scale is the Human Capital Score™ provided? <ul><li>While the algorithm behind the scenes produces very fine graduations of credit risk, we are currently providing the results on a simplified 1-9 scale </li></ul><ul><ul><li>with “+” and “-“ to denote scores that are at the ends of the spectrum. </li></ul></ul><ul><ul><li>For “basic” users, we only provide a Human Capital Score™ for the period 2 years and 8 years post-graduation </li></ul></ul>
  12. 12. So how does Human Capital Score™ work? <ul><li>We have data (that aren’t publicly available) about a large number of students </li></ul><ul><ul><li>Majors, schools, grades, scores, and a host of other attributes </li></ul></ul><ul><ul><li>Earnings in the years after they graduate </li></ul></ul><ul><ul><li>Additional information on how much students with various majors earn, the attributes of the various schools, etc. </li></ul></ul><ul><ul><li>We merge in, and extrapolate, from the most recent trends in the overall income distribution of college graduates – to make sure the Human Capital Score™ reflects the most recent patterns in graduates’ incomes </li></ul></ul><ul><ul><li>Because we have individual-level data on many students, we can predict not only average income but also the range of possible income paths </li></ul></ul><ul><li>We will be able to provide a variety of statistics relevant for repayment – not just expected income </li></ul><ul><ul><li>Students from a given major and school may all have relatively similar incomes; another major or school may have wide variation in graduates’ incomes </li></ul></ul><ul><ul><li>We can estimate the probability that income will fall below a certain value, or the expected income in the worst case scenario (e.g., worst 10 percent) </li></ul></ul><ul><ul><li>We can compute the probability that lifetime income will fall below a certain threshold </li></ul></ul>
  13. 13. What can’t the Human Capital Score™ do (aka “the fine print”)? <ul><li>HCS measures ability to pay, not propensity to pay </li></ul><ul><li>We can only rely on information that we can verify </li></ul><ul><ul><li>If an MIT student joins the circus the Human Capital Score™ cannot reflect this </li></ul></ul><ul><li>If the current recession reduces the incomes of college graduates in the coming years, our estimates of income will be systematically too high </li></ul><ul><ul><li>That said, it will continue to show which students are relatively better options than others. </li></ul></ul>
  14. 14. A worked example
  15. 15. Let’s work through an example: Student X <ul><li>Columbia University </li></ul><ul><li>Computer Sciences Major </li></ul><ul><li>Bachelors Degree </li></ul><ul><li>Dates of Attendance: Sept 2008 – June 2012 </li></ul><ul><li>3.4 GPA </li></ul><ul><li>SAT score: 1860 </li></ul>Get my Score
  16. 16. http://www.humancapitalscore.com is currently in a public beta
  17. 17. “ Basic” results show a 2-year and 8-year Human Capital Score™ …
  18. 18. … However, “premium” results show 10 year income predictions and dispersion measures
  19. 19. Future Development <ul><li>Individual scores for each type of loan </li></ul><ul><li>Income simulations </li></ul><ul><li>Loan payments </li></ul><ul><li>Loan analysis </li></ul>
  20. 20. Step 1: Income Simulations <ul><li>Simulate 10-year income profiles </li></ul><ul><li>Apply permanent and temporary random income shocks each year after graduation. </li></ul><ul><li>Create thousands of simulations </li></ul><ul><ul><li>Each simulation may be higher or lower than the original prediction, but the average across all simulations is approximately equal to the HCS prediction for each year. </li></ul></ul><ul><ul><li>Some people are particularly “lucky” and consistently have income above the predictions, some are especially “unlucky” and end up below the predictions. Others may start higher and end lower, or begin with lower salaries and end very high. . </li></ul></ul>Income Simulations   income yr1 income yr2 income yr3 income yr4 income yr5 income yr6 income yr7 income yr8 income yr9 income yr10 mean 45,308 54,547 65,399 76,919 86,504 97,290 108,780 121,697 133,126 154,373 sd 11,014 12,781 15,492 17,395 19,702 22,806 25,964 29,680 32,449 36,439 Simulations 1 67,648 78,516 68,946 107,582 109,964 121,853 123,849 160,410 112,595 153,768 2 23,659 38,093 39,227 60,922 78,394 57,195 78,706 82,528 100,785 111,277 3 56,169 52,538 57,691 82,360 87,891 109,237 106,469 130,202 140,536 165,934 4 30,055 41,436 56,941 49,747 71,718 70,553 100,529 119,996 131,303 165,695 5 39,986 48,953 56,605 80,599 105,018 132,977 89,675 94,585 106,964 145,274 6 48,410 66,933 76,201 64,194 104,779 111,959 147,424 127,696 160,170 173,338 7 40,011 36,414 51,922 68,296 66,854 69,915 75,133 80,426 106,042 107,033 8 67,858 65,586 83,526 86,785 109,210 102,995 112,062 120,304 147,137 156,360 9 31,707 42,605 45,431 60,128 64,645 60,766 61,168 50,285 76,768 97,477 10 43,271 53,925 60,305 68,236 72,258 76,261 93,237 105,505 124,449 122,657
  21. 21. Step 2: Loan Payments <ul><li>Use year-by-year income simulations to calculate loan repayment schedules </li></ul><ul><li>Make an assumption on loan repayment behavior </li></ul><ul><ul><li>Here we assume that people will never use more than 10% of their annual income to repay their loan </li></ul></ul><ul><li>If the full annual payment can’t be met </li></ul><ul><ul><li>The remaining balance accrues interest and is carried over to the following year. </li></ul></ul>Simulation #4 Year after Graduation Simulated Income Loan Payment Annual Balance 1 $30,055 $3,006 $2,691 2 $41,436 $4,144 $4,512 3 $56,941 $5,694 $4,965 4 $49,747 $4,975 $6,183 5 $71,718 $7,172 $5,326 6 $70,553 $7,055 $4,499 7 $100,529 $10,053 $592 8 $119,996 $6,348 $0 9 $131,303 $5,696 $0 10 $165,695 $5,696 $0 Ending Balance $0
  22. 22. Step 2: Loan Payments contd . <ul><li>Repayment behavior depends on the terms of the loan and the simulated income profile. </li></ul><ul><li>With some income profiles (ie “Lucky” simulation #6) , the full annual payment can be met almost every year and the loan is repaid in full. </li></ul><ul><li>Other income profiles will never be able to meet their annual payment, and will accrue a balance for the entire term of the loan and end with a balance (i.e. “Unlucky” simulation #9). </li></ul>Simulation #6 - &quot;Lucky&quot; Year after Graduation Simulated Income Loan Payment Annual Balance 1 $48,410 $4,841 $855 2 $66,933 $6,637 $0 3 $76,201 $5,696 $0 4 $64,194 $5,696 $0 5 $104,779 $5,696 $0 6 $111,959 $5,696 $0 7 $147,424 $5,696 $0 8 $127,696 $5,696 $0 9 $160,170 $5,696 $0 10 $173,338 $5,696 $0 Ending Balance $0 Simulation #9 - &quot;Unlucky&quot; Year after Graduation Simulated Income Loan Payment Annual Balance 1 $31,707 $3,171 $2,525 2 $42,605 $4,260 $4,213 3 $45,431 $4,543 $5,788 4 $60,128 $6,013 $6,050 5 $64,645 $6,464 $5,886 6 $60,766 $6,077 $6,095 7 $61,168 $6,117 $6,283 8 $50,285 $5,029 $7,579 9 $76,768 $7,677 $6,357 10 $97,477 $9,748 $2,941 Ending Balance $2,941
  23. 23. Step 3: Loan Analysis <ul><li>Using this method, we can analyze the proposed loan in a variety of ways. </li></ul>IRR (Internal Rate of Return), using the average loan payments across all simulations NPV(Net Present Value) of the loan, using an assumed discount rate and the average loan payments across all simulations IRR   Loan Amount -$35,000 Average pmt yr 1 $4,423 Average pmt yr 2 $5,238 Average pmt yr 3 $5,860 Average pmt yr 4 $6,218 Average pmt yr 5 $6,261 Average pmt yr 6 $6,198 Average pmt yr 7 $6,058 Average pmt yr 8 $5,939 Average pmt yr 9 $5,844 Average pmt yr 10 $5,791 IRR 10% NPV     Discount Rate 10% NPV $34,976 % of Loan repaid 99.9% Other Statistics       % of time loan is not fully repaid 1.25% % of people with any late payments 91.63% Value at Risk (5%) $0
  24. 24. Step 3: Loan Analysis contd. NPV     Discount Rate 10% NPV $47,504 % of Loan repaid 95.0% Other Statistics       % of time loan is not fully repaid 44.38% % of people with any late payments 99.88% Value at Risk (5%) $11,488 IRR   Loan Amount -$50,000 Average pmt yr 1 $4,528 Average pmt yr 2 $5,449 Average pmt yr 3 $6,513 Average pmt yr 4 $7,614 Average pmt yr 5 $8,419 Average pmt yr 6 $9,154 Average pmt yr 7 $9,786 Average pmt yr 8 $10,237 Average pmt yr 9 $10,468 Average pmt yr 10 $10,784 IRR 9%
  25. 25. Future Enhancements
  26. 26. Next Steps <ul><li>Discuss analysis needs with target users </li></ul><ul><ul><li>Refine the repayment “rules” </li></ul></ul><ul><ul><li>Incorporate fees or penalty for late payments </li></ul></ul><ul><ul><li>Generate more loan statistics for the lender </li></ul></ul><ul><ul><li>Incorporate other borrower debt </li></ul></ul><ul><li>Build or buy analysis tools </li></ul><ul><ul><li>Build basic analysis tools, or </li></ul></ul><ul><ul><li>License off-the-shelf analysis modules </li></ul></ul><ul><ul><li>Deliver HCS data as feed to incorporate into proprietary risk analysis tools </li></ul></ul>
  27. 27. Additional Materials available upon request: Al Alper, President mobile: 917 658 9008 email: al.alper@people2capital.com <ul><ul><li>People Capital Introduction ~18 pages </li></ul></ul><ul><ul><li>Overview and Opportunity ~55 pages </li></ul></ul><ul><ul><li>Complete Presentation ~150 pages </li></ul></ul><ul><ul><li>Financial Model ~28 pages </li></ul></ul><ul><ul><li>Technology Brief ~77 pages </li></ul></ul><ul><ul><li>Marketing Channel (Philanthropic, Affinity, Corporate) ~27 pages </li></ul></ul>

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