By guest blogger Kevin Connors
The list of public and private organizations pouring money into schools is long and diverse. The bulk of funding, of course, comes from state and local sources, and to a lesser extent, the federal government. But many nonprofits, businesses, and community organizations also contribute. And now, investment banks are starting to make their mark.
Chicago Mayor Rahm Emanuel recently announced that the city will use a $17 million social impact bond, partially financed by Goldman Sachs, to expand the city’s prekindergarten program.
Also known as pay-for-success loans, this form of financing shifts the risk from taxpayers to investors, as lenders are only repaid if students meet academic benchmarks. Specifically, the Chicago program aims to increase kindergarten readiness, improve third-grade literacy, and reduce the need for special education services for an additional 2,620 students over the next four years.
Assuming the benchmarks are met, the cost of future special education and intervention services decreases. The savings, which Emanuel’s office estimates to be up to $9,100 per student, would be used to repay the loan.
“Early childhood education helps create a strong foundation that benefits students throughout their entire education,” said Chicago public schools CEO Barbara Byrd-Bennett in a statement. “By investing in the expansion of prekindergarten programs, we will set more students on the right educational path and eliminate the need and cost for additional educational supports.”
Chicago is the fifth social impact bond program to date in the U.S. Goldman and Chicago-based Northern Trust Corp. are the senior lenders on this project, and the J.B. and M.K. Pritzker Family Foundation is the subordinate lender, the Chicago Tribune first reported.
Goldman Sachs was also involved in a similar pay-for-success loan in 2013 for a 67,000-student Utah school district aiming to expand pre-K access, a deal worth about $7 million. Education Week examined that investment in a story last year.
For more news on mergers, acquisitions, and venture capital in education, follow Marketplace K-12’s “K-12 Dealmaking” series.