The nonprofit Social Finance has used this form of lending as part of its mix of $350M in investments since launching in 2011. With roots
in the UK, the impact investing
organization’s financial returns are dependent
on improving measurable outcomes in education, economic mobility, health, and housing.
“The North Star at Social Finance is optimizing the best path for the student and, ultimately, the worker,” says Tracy Palandjian
, the nonprofit’s CEO and co-founder.
The highest-profile project managed by Social Finance is the recently created $100M Google Career Certificates Fund
, which plans to support at least 20K learners in earning Google certs with no up-front fees
. In exchange, borrowers will be on the hook for interest-free loans to repay the cost of the program’s training and support services,
but only if they land a job with annual pay of more than a set threshold, such as $40K.
Social Finance also offers “Career Impact Bonds” through its $50M UP Fund
to students enrolled in shorter-term training programs it has deemed to be high quality. The bonds are available
to students attending
American Diesel Training Centers, for example, who repay program costs through income-based monthly payments that are capped at set dollar amounts over a specific period of time.
Likewise, the organization uses a similar approach
in partnering with state governments and local workforce funders to try to create self-sustaining pools of job-training dollars, which it calls Pay It Forward Funds. New Jersey in 2020 became the first state to develop such a fund,
which also features zero-interest loans without fees for low-income career seekers.
“We’re optimizing and removing risk for the worker,” Palandjian says, while stretching workforce dollars to maximize their impact.
Loan Terms: The difference between an ISA and an outcomes-based loan is a bit murky. They both are deferred-period loans. And the amount borrowers must repay is based on their future income under both models.
However, by explicitly describing outcomes-based lending as a form of loan, this approach falls under well-established consumer financial law,
experts say. That regulatory clarity is lacking with ISAs,
an issue that has been at the core of some of the biggest challenges
Ascent Funding, a private lender
that offers loans for traditional college programs and bootcamps, has begun prioritizing outcomes-based loans over ISAs, says Ken Ruggiero
, Ascent’s chairman and CEO.
“Due to the constant changes in regulations around ISAs, we had to rethink a financing structure that supported the student and aligned with the school’s interests,” Ruggiero says. “As a result, we used our experience and data to build a loan product that provides the protections students value most while eliminating the complexities often confusing to students.”
For her part, Palandjian doesn’t care about the distinction between ISAs and outcomes-based loans. “It’s all about the terms,” she says. And Social Finance has used both forms of lending.
The organization wants employers to repay loans for their workers, which more than half of its diesel tech employers do. Likewise, the NJ CEO Council is contributing money to New Jersey’s Pay It Forward Program, while the state is kicking in $5.5M in FY 2022.
The fund is focused on short-term certificates in high-demand fields, including healthcare, IT, and clean energy. Partners in six other states are developing similar programs with a mix of government, corporate, and philanthropic support.
The Social Finance loan pools can only replenish themselves if students successfully land living-wage jobs and are able to “pay it forward” to support future learners. And training providers have skin in the game, Palandjian says, because they recover all their costs only when learners graduate and earn good wages.
“We believe learners shouldn’t have to incur unmanageable debt to access economic opportunities,” she says, adding that the outcomes-based loans are “designed to finance upskilling at scale while providing learners with favorable terms and supportive services.”
MDRC is conducting a multiyear study of the group’s Career Impact Bond model. In the meantime, do you think this is a good approach? Better than an ISA?
I asked several consumer advocacy groups to weigh in but didn’t get any responses. So please send thoughts my way