By Megan Golden
Policy makers, college administrators, and parents are all searching for ways to help needy students graduate. They have offered a variety of solutions to accomplish this: freezing tuition, reducing student-loan interest, allowing graduates to refinance, increasing community-college enrollment, improving freshman advising, ranking colleges on the basis of graduation rates. But one option is missing from the debate: pay-for-success financing.
Under pay-for-success financing, which started in Britain in 2010, the government pays for outcomes that programs achieve rather than for the services themselves. Here is how it works:
1. Private investors—individuals, corporations, or foundations—provide money to develop cost-effective programs on a large scale.
2. The government agency responsible for the outcomes signs contracts to pay back the investors, with a premium, if the programs achieve agreed-upon results.
3. An impartial evaluator determines whether outcomes are achieved. If so, the investor is repaid with interest.
4. An intermediary manages the project, contracting with the investors, the government, and the service providers.
This type of philanthropic financing is emerging as an important way for investors to make a difference. According to J.P. Morgan and the Rockefeller Foundation, which are involved in such financing, the estimated size of the impact-investing market is $400-million to $1-trillion over 10 years.
New York City started the first pay-for-success project in the United States in 2012, aimed at reducing recidivism among 16- to 18-year-olds. Goldman Sachs invested $9.6-million, recoverable if the evaluation shows that the intervention—a behavioral therapy offered by two nonprofit organizations—keeps the target group out of jail at rates exceeding those of a matched comparison group. Interim results will become available in the summer of 2015 and final results a year later. Since then, three other jurisdictions have launched pay-for-success projects. Many more are in the works, in fields like early-childhood services, work-force development, and pregnancy prevention.
Could pay-for-success financing work for higher education?
The general idea of tying financing to performance is already a subject of much discussion among colleges. Driven by growing demand for public accountability, a majority of states are now experimenting with performance-based funding for two- or four-year public colleges. In those models, states reserve some percentage of annual funds for higher education according to a performance formula decided by the legislature. Some states report positive results, with graduation rates exceeding expectations.
But without a focus on graduating low-income students, colleges can achieve the desired outputs by simply changing the inputs. That is, they can select students most likely to succeed, usually those with money and college-educated parents. Moreover, those efforts do not bring in investors to cover the upfront costs, and they do not have a way to capture the longer-term savings from increased college-graduation rates and shift them into the higher-education system.
Pay-for-success would work differently. First, the program would provide support services to a specific cohort: those students described by Paul Tough in a recent New York Times Magazine article as "high-achieving students from low-income families who want desperately to earn a four-year degree but who run into trouble along the way." An impartial evaluator would compare that group’s graduation rate with that of students who are just like them but who didn’t participate in the program.
Second, private investors would pay the upfront costs that are now standing in the way of students’ graduating. These could be tuition and expenses not covered through scholarships, or the cost of programs to keep students enrolled. Investors would assume much of the risk of the students’ not graduating at a higher rate. Although investors may earn modest returns, they can make a positive impact on society and prepare a strong work force—one on which the success of their own industry may rely.
Third, states would fund colleges that produce higher graduation rates, much as is already so in pay-for-performance states. However, the pool of funds for outcome payments would include the savings that accrue from other positive outcomes, including reduced costs for social services and the criminal-justice system, and increased tax revenues from greater employment at higher wages, a result of more residents’ having college degrees.
Although there are differences between higher education and other services in which pay-for-success has been tried (for example, lenders, including the federal government, already pay much of the upfront cost of higher education, and graduates pay it back with interest), the idea is well worth exploring.
Cost, access, and attainment are complex problems requiring a range of solutions and involving a number of stakeholders, from the White House to banks to financial-aid counselors to my own 10th-grader. Pay-for-success is one more strategy. But as the nation moves toward performance-based funding for higher education, we must strive for access and equity. Pay-for-success is a financing mechanism that can infuse new dollars into higher education to support students who need the most help to graduate. Our society and our economy will benefit.
Megan Golden is a senior fellow at the Institute for Child Success and a fellow at the Wagner School of Public Service Innovation Labs at New York University.