Wednesday, September 22, 2010

Preying on the American Dream

Have you seen those full page ads decrying the Department of Education’s proposed "gainful employment" rule? This rule will require for-profit educational institutions receiving income from Federal student aid programs to document that their programs meet statutory requirements for preparing students for gainful employment. The ads, provided by Corinthian Colleges, Inc., one of the largest for-profit education institutions, claims the proposed rule will result in up to 100,000 working Americans losing their jobs and urge readers to “Get the facts at My Career Counts.”

A better source of information would be a report entitled Are you Gainfully Employed? Setting Standards for For-Profit Degrees by Education Sector, an independent, non-profit organization. According to this report many for-profit institutions derive most of their income from Federal government with the five largest, including Corinthian, receiving more than 77% from student financial aid programs. Little wonder that Corinthian and other institutions of its ilk are concerned that greater scrutiny on how their students fare after incurring large debt obligations to enroll in their programs might constrain the flow of government money into their coffers.

The Education Sector report opines that “The proposed standards for institutions participating in the title V, HEA programs are necessary to protect taxpayers against wasteful spending on educational programs of little or no value that also lead to high indebtedness for students. The proposed standards will also protect students who often lack the necessary information to evaluate their postsecondary education options and may be misled by skillful marketing, resulting in significant student loan debts without meaningful career opportunities.”

Doesn’t this sound like a replay of the sub-prime mortgage debacle where ill-equip low income borrowers were enticed to take out loans they didn’t understand and were ill-suited for their circumstances? Now both education and home ownership, two key components of the American Dream, are under assault by profit seeking private enterprises cashing in on government programs designed to aid low income Americans. This is more evidence that greed may do more harm than good to social ventures (see my post Is Greed Good for Microfinance?).

What I find most interesting is that the Gainful Employment rule proposes to measure the effectiveness of education programs using market data, not complex, artificial standards promulgated by Department of Education bureaucrats. There are two simple tests. One is based on the debt-to-income ratio of program graduates; the second is based on student loan repayment rates. If education institutions demonstrate that their graduates get jobs paying enough for them to comfortably repay their loans, the institutions will have continuing access to the Federal student aid funding. Only programs with poor histories placing students in adequately paying jobs will find their access to the Federal student aid programs constrained.

Contrary to the splashy ads provided by Corinthian Colleges, Inc., nothing in the Gainful Employment rule threatens the jobs of those already employed. The only educational opportunities that low income students would lose would be those shown to be ineffective in qualifying them for jobs that would enable them to repay their loan obligations and adequately support themselves. Far from thinking that these students and their careers “don’t count,” as the ad claims, the Department of Education is appropriately looking after the interests of students by promulgating this new regulation.

In my work helping low income people better manage their financial affairs I have seen cases where debt incurred to pay for education programs that failed to deliver on the promise of a good paying job has become an enormous millstone, crushing any hope for living a better life. The proposed Gainful Employment rule seems a small, reasonable step to prevent unscrupulous promoters of ineffective education programs from preying on the aspirations of low income Americans for attaining the American Dream.

Monday, September 13, 2010

Show Us the Money!

My last two blog posts were written in support of my entry to the SOCAP10 Challenge (see below $120 Billion Opportunity for the Poor and What the World Needs Now is Community Development Bankers). I focused on the issue of creating the “Human Capital” I believe is necessary for unlocking resources for high impact social investments identified in the Money for Good
report produced by Hope Consulting. In this post I want to talk about the money.

The Hope Consulting report is an extraordinary piece of work. It contains a wealth of information that will be of great use to many non-profits and for-profit social ventures seeking funding for their efforts to alleviate global poverty. As I read the report looking for information pertinent to my proposal I was struck by three findings. First, I was surprised to learn that more than 50% of the $120 billion Hope Consulting estimates is available for high impact social investments comes from existing investment funds of potential investors. Second, not so surprising to me, a majority of these individuals work with financial advisors and would prefer to execute their social investments through their advisors. Third, most existing socially-focused venture capital funds have minimum investment requirements in excess of the $25,000 “threshold” of potential social investors.

Three recommendations of the report which I found particularly relevant were: structure products with relatively low investment minimums (<$25,000); make opportunities readily accessible (i.e. through financial advisors) and position the products as investments, not alternatives to charity. The report also highlighted some potential barriers from investors’ perspective and their key concerns. The barriers related primarily to the “novelty” of the high impact social investment market. The key concern was for the risk to investors’ principal.

By definition, social investors are not interest in a high return—if any at all—mainly just the security of their investments which to them represents the sustainability and efficacy of the businesses in which their funds are being invested. Hence, my rationale for the need for the Human Capital capable of managing high impact investors’ funds in a manner that gives them confidence in the relative security of their investments.

The report states flatly: “Financial advisors are the key to this market.” This argues for an investment vehicle fully compliant with securities regulations that are tradable and easily marked-to-market. Furthermore, it would be helpful to offer some incentive for financial advisors to offer such a product to their clients. Although challenging, I do not believe these are insurmountable requirements.

The Hope Consulting report gives specific examples of organizations already offering products that are successfully attracting high impact investors. With a little tweaking and the right marketing I believe we will be able to attract social investors into the business of community development banking.

Wednesday, September 8, 2010

What the World Needs Now is Community Development Bankers

The SOCAP10 Challenge has moved into the final week of voting and, thanks to many of you, my proposal to develop more human capital—people trained to help low-income communities create, fund and manage businesses that can alleviate poverty—is currently one of the leading ideas to win the competition. However, the competition is far from over and there are many other good competing ideas. If you haven’t already voted, go to Myoo Create and do so by September 14th.

One thing that voters seem to find compelling about my idea is that it will also create exciting entry-level jobs for young college graduates who are entering the market in a very difficult economic environment. I have made the analogy to Teach for America which is drawing top students from leading universities and training them as teachers in inner city schools. I believe we can tap into this same rich vein of talent to find graduates interested in becoming what I have called “community development bankers.”

In my last blog post (see $120 Billion Opportunity for the Poor below) I crunched a few numbers and estimated it would take about 175 community development bankers (CBD) to deploy $100,000,000 in Individual High-impact Investments (IHI) to reach about 5,700 low-income entrepreneurs over the course of one year. Assuming each IHI had an average tenor of three years, we would need almost 70,000 CBDs to deploy the entire $120 billion the Hope Consulting report estimates is available for funding IHIs. Now that is scale!

But let’s be modest and say we are only going to work with 10% of what is available. That is still about 7,000 CBD jobs and funding for around 700,000 low-income business owners. How to do this? Clearly, we need to collaborate with academic institutions and experienced MFIs and banks to develop the curricula and provide venues for training. Preliminary discussions I have had with a few institutions have been encouraging. I am convinced that within a year we could have programs in place in leading business schools, liberal arts colleges, community colleges and university extension programs.

The short-term goal would be to create a pipeline of CBDs of about 2,000 per year so that in three years we would be close to having a cadre of young bankers working in low income communities capable of deploying IHIs of about $3 billion per year. But for whom, exactly, do the CBDs work? Again, taking Teach for America as a model, as school districts employ the students trained by Teach for America so would existing non-profit MFIs, already working in low income communities around the world, employ the trained CBDs.

One might ask what would motivate these non-profits to hire the CBDs? The answer is that they come trained to be effective community development workers and they come with funding! More about this in my next post. For now it’s important to continue developing enthusiasm for this idea by voting for Build Human Capital for Social Investing at Myoo Create.