An Idea for a Pay for Success / Social Impact Bond

pay

I’ve been in New Orleans all week, which is always great.

On Friday, I got some time with Stephen Rosenthal, my former board chair at NSNO.

He made the following argument:

  1. We spend ~150K to educate a child K-12.
  2. Then we send many of these children to college, where many of them drop out.
  3. Groups like KIPP to College and POSSE are demonstrating that spending another ~5K per kid can significantly increase the odds that a student will graduate from college.
  4. Right now, there isn’t much public funding for these programs.

He makes a good point: would you rather spend ~150K and have a ~10% chance of getting a student in poverty through college or ~155K and have a ~30% chance of getting a student in poverty through college?

While the numbers may not be exact, you get the idea.

So why not create a pay for success / social impact bond program?

Many cities and states have “promise” scholarships that guarantee free or near free in-state tuition for qualifying students.

Why not allocate a portion of these funds to providers who are only paid for each marginal student in their program who graduates college above baseline completion rates?

A provider could then raise debt based on an investor’s belief that the provider will help students through college.

If the provider works, it receives money from the government, the debt is paid off, and college completion rates go up.

If the provider fails, tax payers lose nothing.

 

5 thoughts on “An Idea for a Pay for Success / Social Impact Bond

  1. Mike

    Hi Neerav,

    What’s the evidence for this? (Seriously)

    “Groups like KIPP to College and POSSE are demonstrating that spending another ~5K per kid can significantly increase the odds that a student will graduate from college.”

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  2. Ciro Curbelo

    In this case, I think SIB’s are over-complicating it a bit.

    Why not do pay for success but have the student pay (say, 6 months after starting their first job after college). Imagine the pitch to the student…..”I will provide X services that **should** help you graduate from college. If you and I succeed, that is, you graduate from college and get a job that requires your education, then you pay me back… 6 months into that first job”.

    That strikes me as a better approach than SIBs….The student does not have to pay anything up front. And because they have to pay out upon successful completion, they are likely to take on a field of study that pay enough to justify any costs they pay and (including the opportunity cost of 4 years of their time). The provide has to float the cost of the service for 4.5 years. But hey – if the believe in their program it won’t be a problem, right?

    The main challenge I see is that the provider won’t partner with students it thinks it won’t be successful with. Which puts the onus on each students to convince their desired partner of the likelihood of their future success. And entrepreneurs with better and better models would always emerge to expand the number of kids served (including those the actuarial data says are higher risk). This market sounds similar to the housing market works….

    Which begs to ask, why doesn’t this market already exist?

    I would have loved a service like this when I was a kid, growing up a poor soon to working class immigrants. A mentor/coach to showed me what my options were and “how to play the game”. These things are just not known to working class folks – I didn’t even know what ivy league was when i went to college. And I had no idea of the diversity of careers I could make for myself.

    Are SIBs are a distraction? I don’t think we need complicated financial instruments that require third party financiers. Let KIPP’s service (and those of others) stand on their own merits.

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