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The rise of outcomes-based loans

Photo by Bannafarsai_Stock via Shutterstock

Social Finance expands zero-interest loans for learners in short-term training programs, with support from governments and employers. Also, the White House calls for public-private partnerships to ramp up training for infrastructure jobs. And instructor training aimed at student success.


The Job
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Outcomes-Based Loans

As income-share agreements are becoming toxic amid unflattering headlines and regulatory pressure, outcomes-based loans appear to be on the rise.

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 for ISAs.

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.

Training Workers for Infrastructure Jobs

The White House last week launched a summer-long initiative to get labor unions, companies, and state and local governments to work together to train workers for millions of new jobs expected to be created by the bipartisan infrastructure law.

More than $110B, out of a total $1.2T, already has been allocated to road, broadband, energy, and other infrastructure projects and is headed to the states. But the administration is concerned the country won’t have enough trained workers to make those projects a reality—with highway and other construction projects being stymied by major labor shortages.

The new Talent Pipeline Challenge specifically focuses on training workers for good jobs in the broadband, construction, and electric vehicle sectors.

  • The administration is asking states and municipalities to use $800M in job-training funds provided under the legislation to quickly increase the supply of workers for high-quality jobs in those fields.
  • It also is encouraging governments to direct more pandemic relief funds to job training.

The initiative is especially focused on encouraging governments, industry, and education providers to work together to increase access to high-quality jobs for women, people of color, and underserved workers. In that way, it mirrors another initiative—the Good Jobs Challenge—which received applications from more than 500 local and regional partnerships.

On the Ground: In Missouri, Mardy Leathers, director of the state’s Office of Workforce Development, is thinking about how to bring in some of the federal training money, which will be awarded through a competitive process.

Last week’s announcement made clear that the administration’s top priorities are equity and job quality, he says, and that states and municipalities will need to focus there.

“Does it change what we do? Not necessarily,” says Leathers. “Does it help us understand what we need to do to get those dollars? Yes.”

Any major training effort, though, will require a high degree of coordination with municipalities and other agencies—in particular transportation departments—that are focused on the immediate demands of getting projects underway. Missouri has been allocated $1.9B from the law for infrastructure projects, with more to come.

“It’s us going to the state highway commission and saying, ‘Hey, I know you’re way behind on projects, but let’s carve out some money and time for workforce training,’” Leathers says. 

Those conversations are happening, he says, but getting to yes will require a paradigm shift that doesn’t happen overnight.

Industry and Labor: Major employers—like Ford, which produces F-150s and electric delivery vans in Kansas City—are at the table too, Leathers says. Nationally, union leaders, including the AFL-CIO and International Brotherhood of Electrical Workers, have signed on to the pipeline initiative, as have corporate giants like AT&T, Bechtel, and Siemens AG.

  • Siemens—which plans to produce 1M electric vehicle chargers by 2025—is developing new technical training pathways with college partners and recently started an apprenticeship program at its manufacturing facility in Spartanburg, South Carolina.
  • The Germany-based company trains 10K apprentices a year in its home country and has been eager to expand work-based learning in the United States.

The Biden administration also highlighted a number of partnerships between industry and education providers—such as a new fiber-optic program at Wilson Community College in North Carolina—that are designed to expand apprenticeships.By Elyse Ashburn

Credentials for Instructors

Perhaps the biggest factor in student success—including after college—is personal engagement with a faculty member.

The Gallup-Purdue Index, for example, surveyed 30K U.S. college graduates and found that those who landed good jobs and were satisfied with their lives were more likely to have had at least one instructor who excited them about learning, cared about them as people, and encouraged them to pursue goals.

The Association of College and University Educators offers training and credentials that are designed to help faculty develop skills to better connect with students. Founded in 2014, the ACUE has been endorsed by the American Council on Education. It has credentialed 21K faculty members and partnered with 450 colleges and universities.

The company released an analysis showing positive results for students who took courses from ACUE-trained instructors at the University of Arkansas, Pulaski Tech. Black and Latino students saw the largest benefits.

  • The predicted probability of passing courses for students of ACUE faculty was 3.2 percentage points higher than otherwise expected had faculty not earned the credential.
  • Results suggest an additional 120 students passed their courses.
  • An estimated 145 fewer students received DFW grades in their courses.

Pulaski Tech offers two-year degrees and certificates, with programs in allied health, aerospace technology, business, culinary arts, IT, and other fields. Roughly half of its 4,800 students are Black. 

The institution first tried ACUE’s training in 2017, offering a small stipend to interested faculty members as part of a pilot. Since then, 98 percent of its full-time faculty have become ACUE certified. Pulaski Tech’s part-time instructors will begin the training this fall.

Margaret Ellibee, Pulaski Tech’s longtime chancellor, who is retiring this month, was attracted to ACUE by what she heard from other community colleges. She says her institution, like others in the sector, has had to quickly transform to retain more students and keep them engaged.

“We want to be able to tell our students that UA-PTC has great faculty,” Ellibee says. “Certification adds to their tremendous ability in the classroom.”

Open Tabs

ROI Policy

The rule-making process for a gainful-employment regulation proposed by the Biden administration has been delayed until next year, according to a new notice from the U.S. Department of Education. The rule would create an earnings floor for vocational programs based on the average wages of high school graduates. With the delay, the earliest the rule could go into effect would be July 2024.

Enrollment Crisis

Total head-count enrollment at the Colorado Community College system increased by 2 percent this spring compared to the previous year, reports Lee Gardner of The Chronicle of Higher Education, for a broad piece on the sector. Joe Garcia, the Colorado system’s chancellor, said that “students are signing up but taking fewer courses, on average, than they did two and three years ago.”

Digital Skills

The skills expected for the average job in the United States have changed 37 percent since 2016, according to an Emsi Burning Glass analysis of 15M job postings. The shift has been driven by demand for digital skills in nondigital occupations, soft skills in digital jobs, and visual communication and social media skills in many roles. Jobs that have seen the biggest changes include data engineer, industrial psychologist, and talent acquisition.

Student Success

Students who left college before graduating were more likely to choose their institution because it was close to home and affordable than their peers who graduated, with financial aid and a specific academic program being among the broad list of reasons cited by completers. The recent national survey conducted by IPSOS and Sallie Mae also found that noncompleters worked longer hours at a job while enrolled in college.

Career Competencies

States, higher education systems, and colleges should use proven, targeted strategies to improve student outcomes for students from underserved backgrounds, according to a recent report from Complete College America. The group’s recommended equity reforms include making information on careers available to all students and creating a clear connection between classroom learning and career competencies.

Career Readiness

“Our students, especially our first-generation students—and their parents—have been telling us for a while that they need their college education to lead to an unmistakable return on investment,” Kerry Fulcher, the provost at Point Loma Nazarene University, wrote in an essay for Inside Higher Ed. “That means we need the degrees we provide to develop career readiness skills and offer clear pathways to student employability.”

The Job supports vacations, and I’m hitting pause on the newsletter for most of July. So next week’s edition will be the last one for a bit. Thanks for reading. —@paulfain

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