With the newly-signed Every Student Succeeds Act (ESSA) becoming the K-12 law of the land, some critics are decrying one particular clause: the “Pay for Success” initiative. It's a program that allows for private investors to profit from returns on the upfront financing of educational programs, for example, with social impact bonds.

In layman’s terms, Pay for Success means that private firms can step up to pay for public services. They’re then repaid with interest, subsequently turning a profit, if the services funded result in cost savings for the state.

Within the new ESSA package, the Pay for Success initiative can be found on page 797, within a section describing Title II funds. It reads:

PAY FOR SUCCESS INITIATIVE.— The term ‘pay for success initiative’ means a performance-based grant, contract, or cooperative agreement awarded by a public entity in which a commitment is made to pay for improved outcomes that result in social benefit and direct cost savings or cost avoidance to the public sector. Such an initiative shall include—

(A) a feasibility study on the initiative describing how the proposed intervention is based on evidence of effectiveness;

(B) a rigorous, third-party evaluation that uses experimental or quasi-experimental design or other research methodologies that allow for the strongest possible causal inferences to determine whether the initiative has met its proposed outcomes;

(C) an annual, publicly available report on the progress of the initiative; and

(D) a requirement that payments are made to the recipient of a grant, contract, or cooperative agreement only when agreed upon outcomes are achieved, except that the entity may make payments to the third party conducting the evaluation described in subparagraph (B).

Sen. Orin Hatch (R-UT) takes credit for the inclusion of the initiative.

“With Pay for Success, state and local leaders will be empowered to fund initiatives that deliver real results for their communities and schools,” Hatch said in a release on his website. “Rather than being limited by what federal bureaucrats at the Department of Education think best, funding should be more connected to local innovation and successful outcomes.”

He pointed out that specific interventions “are not spelled out… allowing providers the flexibility to adopt whatever strategies they determine will be most effective,” noting also that, in some cases, “private investment provides upfront financing, taking on the risk that the intervention won’t succeed and recovering the investment if it does.”

On her blog, Deutsh29, teacher and statistician Dr. Mercedes Schneider, author of the book "A Chronicle of Echoes: Who's Who in the Implosion of American Public Education," noted that pay-for-success initiatives are also found within Title I, Part D, (“Prevention and Intervention Programs for Children and Youth Who Are Neglected, Delinquent, or At Risk”) and in Title IV, Part A, (“Student Support and Academic Enrichment Grants,” section 4108, “Activities to Support Safe and Healthy Students”) of the new bill.

Dr. Schneider is a staunch critic of Pay for Success' inclusion.

“The lure of Pay for Success is the money,” she said. “So, in states where market-based education reform has taken hold, Pay for Success is more likely to be heralded as benevolence and the profit motive downplayed-- and it will likely lead to scandal.”

Some other education advocates agree.

Former assistant U.S. education secretary and New York University education historian Diane Ravitch called the initiative an outright “threat,” telling readers of her blog to phone lawmakers "at once to stop this money-making scheme.”

Some parents, teachers, and education activists have already created an online petition calling for the initiative’s removal from the ESSA.

“Investors are paid off when a student IS NOT referred to special education,” the petition’s description says. “The education of our most vulnerable children should NOT BE FOR SALE TO WALL STREET!”

But are they really?

Lexi Barrett, policy director for America Forward, the policy arm of the nonprofit venture philanthropy fund New Profit, calls the clause a “promising update” within ESSA.

Barrett previously served as policy advisor at the U.S. Department of Education in the Office of Elementary and Secondary Education.

“The Pay for Success authority included in the Every Student Succeeds Act is not a mandate but an allowable use option that state and local education agencies can choose to incorporate into how they structure funding decisions — using outcomes as the driver of payment allocation,” she told Education Dive.

“Given the significant impact that a solid education has for children and youth, and thus the need to ensure that the system educating our young people is effective and achieving the desired outcomes we all want,” she continued. To her, Pay for Success is just one instrument in the education system's general toolkit, aimed at helping children.

“By focusing on results and creating incentives for cost-effective interventions, Pay for Success expands funding for high-quality programs that actually deliver results, leading to greater benefits for students,” she wrote in a recent blog post on the New Profit website.

A case study in Utah: Goldman Sachs and pre-schoolers

In Utah, some Pay for Success pilots have already seen results.

“In the project underway in Salt Lake County, UT, the County, the State, the United Way of Salt Lake, and other private and public entities have partnered to provide up to 2,600 low-income children with access to preschool while assessing the impact of the program on the children's future educational progress and needs,” Barrett said. “Decades of research has shown that high-quality early education is an investment with significant positive returns and Pay for Success projects like the one in Utah are testing whether those future positive returns can be harnessed to expand access for more children today.”

Yet one particularly high-profile pilot recently came under intense scrutiny.

A partnership between Goldman Sachs and J.B. Pritzker initially committed $7 million to a pay-for-success program aimed at funding “preschool services for five cohorts of children,” the Salt Lake Tribune reported, noting that 95% of state special ed savings would go to the firms until investments were repaid. And after that, 40% of the ongoing cost savings would be kicked back to the investors “until the participating students complete sixth grade.”

Last month, the New York Times reported that the metrics used to measure success for Goldman Sachs’ pre-school experiment seemed fishy. The corporation received a reported $267,000 return on investment for the success of the 109 Utah preschoolers who participated in the program and avoided going into special ed in kindergarten.

According to the Times, which retained nine early childhood education experts to review the program, the program’s success was based on a metric system that boasted “a number of irregularities…which seem to have led Goldman and the state to significantly overstate the effect that the investment had achieved in helping young children avoid special education.”

The paper also highlighted the fact that the near-perfect success rate was based on a “faulty assumption” that kids in the program were going to need special ed, “despite there being little evidence or previous research to indicate that this was the case.”

Education expert and author Beverly Holden Johns wasn’t surprised.

“Goldman Sachs probably made over a 100% profit because it carefully picked school districts in Utah which had a very flawed system for special education,” Johns told Education Dive. “The blame belongs to both the school districts, which had to know they were practicing an extreme form of full inclusion in the general classroom without giving students and their parents any of the legal protections of IDEA [the Individuals with Disabilities Education Act], and to Goldman Sachs, which claimed it had the best of motives while making a huge profit.”

Johns doesn’t, however, think the Goldman Sachs model will be prevalent.

“Pay for Success could be used for many different purposes in schools,” she said. “But there will certainly be an attraction to the Utah model where schools are trying to avoid IDEA, and Goldman Sachs or other investors see a sure way to profit.”

Yet the criticism levied by the New York Times against the Utah initiative has also been called into question.

In a story for US News and World Report, reporter Katharine Stevens noted that it wasn’t up to Goldman to determine the efficacy of its program, calling it “a step in the right direction” and saying that any new innovation should expect “bumps in the road.”

"What's being highlighted here isn't actually a problem with Pay for Success at all, but a big, usually invisible, problem with the field of education research itself,” Stevens wrote. “Indeed, the research base used for the Utah project's payment metrics is as good as what's used for most education projects. What's remarkable about Utah, though, is that in contrast to K-12 business-as-usual, program results are being measured, reported and debated. Improvements can be made going forward. Success metrics can be refined and strengthened.”

Chicago, too, has piloted five Pay for Success programs, partnering with Goldman Sachs, Northern Trust, and the Pritzker Family Foundation. One particular preschool plan was expected to give funders a 6.3% return on investment.

Is what critics call a 'money-making scheme' proven to work?

According to both the Chronicle of Philanthropy and Nonprofit Quarterly, using Pay for Success initiatives for funding isn’t widely accepted in the non-profit world.

“Some people consider this form of investment in the charitable sector promising,” the Chronicle states, “but it remains untested on a broad basis.”

So what does that mean overall?

It’s as-yet unknown. But the controversy connected to the use of public-private partnerships like social impact bonds to fund education will likely continue, due to ongoing questions around accountability and achievement metrics.

John Hoffmire, the director of the Impact Bond Fund at Oxford University’s Saïd Business School and director of the the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison, points out that some investors might actually not expect a return, since “there may be little or no knowledge on whether or not the program will be successful”.

“Clearly such an investment would not be attractive to those who are only interested in making a profit,” he wrote in a Deseret News column. “However, many corporations and philanthropists already donate large sums of money to charity without any expectation of a return.”

Yet that logic defies the most basic definition of the Pay for Success approach: the fact that funders commit after negotiating a return.

That return, critics say, may be problematic moving forward.

“Instead of financing schools with public funds, we are using profit-making organizations using private funding in very complex contracts where all the financial expertise lies with the profit-making organizations,” said Beverly Holden Johns, pointing out that several contracts exist in relation to each individual Pay for Success project.

“Over time Pay for Success will drain money from the public schools, reduce the specialized and individualized education we call special education, and reduce long-term funding for schools where excessive profits are earned by Goldman Sachs and similar organizations.”

Dr. Schneider agrees.

“Pay for Success — a name that has ‘do whatever it takes to garner a profit’ in its shadow-- is an open door for the exploitation of students, particularly subgroups of students who do not usually score well on tests,” she said. “It is just another testament to the nouveau status quo that market-based reform will drive up testing metrics, and that America should entrust its children to that market.”

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