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New worker training model bases pay on students' hiring

by STEVE LOHR THE NEW YORK TIMES | April 8, 2021 at 1:54 a.m.

Bill Barber saw an ad on Facebook last year for American Diesel Training Centers, a school in Ohio that prepares people for careers as diesel mechanics. It came with an unusual pitch: He would pay for the schooling only if it landed him a job, thanks to a nonprofit called Social Finance.

After making sure it was not a scam, he signed up. After going through the immersive five-week program, he got a job with starting pay of $39,000 a year -- about $10,000 more than he made before as a cable TV installer.

"I figured this was my best opportunity to succeed," Barber, 23, said.

American Diesel Training is part of a new model of workforce training -- one that bases pay for training programs partly on whether students get hired. Early results are promising, and experts say the approach makes far more economic sense than the traditional method, in which programs are paid based on how many people enroll.

Right now, there are only a handful of these pay-for-success programs that train low-income Americans for better-paying careers. The challenge has been to align funding and incentives so that students, training programs and employers all benefit.

But Social Finance, founded a decade ago to develop new ways to finance results-focused social programs, is showing how the idea could grow quickly just as the pandemic made job-training programs more important than ever. The coronavirus put millions of people out of work, upended industries and accelerated automation.

State and federal officials are now looking for new ways to improve workforce development. President Joe Biden's $2 trillion infrastructure and jobs plan, announced last week, includes billions for workforce development with an emphasis on "next-generation training programs" that embrace "evidence-based approaches."

The Social Finance effort is powered by a fund of more than $40 million raised from philanthropic investors. The money goes toward paying for low-income students, as well as minority group candidates and veterans, to enter the training programs. The group is not related to the online lender SoFi.

It has supported four job training programs, including American Diesel Training, in the past year. It has plans to double that number a year from now.

Social Finance is advising Ohio on pay-for-success programs and is in talks with several other states. The financing arranged by Social Finance from investors is called a career impact bond, while the state-backed initiatives are called pay-it-forward funds -- since payments from job-holding graduates help pay for new students.

Social Finance is also preparing a proposal for the new labor secretary, Martin Walsh, recommending that the federal government provide matching funds to accelerate state programs.

A few nonprofits have a track record of lifting low-income Americans into higher-paying jobs, including Year Up, Per Scholas and Project Quest. Their training is tightly focused on specific skills and occupations, they work closely with employers, and they teach soft skills like communication and teamwork. But there are too few of them, and they struggle for sustainable financing.

Social Finance is seeking, designing and supporting new programs -- for-profit or nonprofit -- that follow that training formula but then apply a different funding model.

"There is emerging evidence that these kinds of programs are a very effective and exciting part of workforce development," said Lawrence Katz, a labor economist at Harvard. "Social Finance is targeting and nurturing new programs, and it brings a financing mechanism that allows them to expand."

The social venture's more than $40 million fund is seed money for demonstration projects that show its model could be widely used, whether backed by government or by investors in social programs, across a range of occupations, including skilled trades.

"The goal is to create a tool for impact, to get more people on the economic escalator," said Tracy Palandjian, co-founder and chief executive officer of Social Finance.

The Social Finance income-share agreement with students ranges from about 5% to 9% depending on their earnings -- less from $30,000 to $40,000, and generally more above $40,000. The monthly payments last four years. If you lose your job, the payment obligation stops.

"Our investors aren't after high returns. They're primarily after social impact," Palandjian said.

When screening programs, Social Finance looks for those that offer training for specific skills linked to local demand, and have data to show that its students graduate and get good-paying jobs. In selecting a skilled-trade school, Social Finance, working with Burning Glass Technologies, which analyzes job-market data, sought a program for an occupation in demand with potential for the worker to move up the career ladder.

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