Impact investing, with its promise of both financial returns and measurable social benefits, is one of the hottest trends in philanthropy. But as more legacy foundations look to harness the "other 95 percent" of their capital to their mission, and as newer business-minded donors flood into the field, plenty of questions remain about where and how impact investing is likely to be most useful or effective.
Clearly, this tool has a lot to offer when it comes to capital-intensive challenges like housing, community development, and the creation of new drugs, such as vaccines. In these areas, there are acute limits to what can be achieved through traditional grantmaking and so there's much excitement about bringing new financial muscle to bear. Likewise, impact investing has made big inroads when it comes to the development of new technology to solve social problems—especially in regard to education, with much now happening in the edutech area. In addition, as we've reported, there's been an explosion of impact investing to expand charter schools, with many of these investments taking the form of long-term loans to finance new facilities construction.
But what about higher education? What's the potential for impact investing in this arena?
We looked at this question last year, noting that there was only limited activity so far, which struck us as unfortunate, given the magnitude of challenges in this sector, from rising tuition costs to the increasing need for more American adults with postsecondary credentials. The expense of higher education is well known, with total spending by these institutions topping over a half-trillion dollars annually. Meanwhile, some 44 million Americans now owe around $1.4 trillion in student debt. Fears of amassing debt now keep many younger people from pursuing more education after high school.
Surely, there must be new ways to mobilize low-cost and socially targeted investment capital to increase access to postsecondary education, as well to improve its quality.
Two leading higher education funders are on the case, and recently published a new report arguing for a lot more impact investing here. Avivar Capital completed the report, "Driving Postsecondary Success With Impact Investing," which was commissioned by the Kresge and Lumina foundations.
As we've noted before, Lumina has long considered impact investing as a way to advance its mission to increase the proportion of Americans with high-quality degrees and other credentials to 60 percent by 2025.
In 2016, Lumina unveiled a trio of impact investments in the higher ed space. These investments include the technology platform Credly; intervention service provider BridgeEdU, to improve college retention and completion among at-risk first-year students; and venture philanthropy fund New Profit.
Kresge, meanwhile, is another longtime higher ed funder, and it's lately become an increasingly active impact investor, committing to make $350 million in impact investments by the year 2020. So far, though, its social investments have mainly been around issues such as housing and community development.
The central thesis of the new joint report is that greater levels of impact investing are needed to close the gap in college graduation rates between low-income students and their more affluent peers.
Trends driving change in higher education and thus creating opportunities for more impact investing include decreasing college affordability, accompanied by soaring student debt loads; demographic changes in the nation's population and its college students; technological advances that shift the delivery of educational services; changes in the labor market and the rise of automation; and the growing relevance of community colleges.
Greater impact investing can lead to greater solutions in a range of areas. Those identified by the report include helping students successfully transition from K-12 to postsecondary education, improving financial literacy for students, improving college readiness among high school students, providing greater supports for undocumented students, and better coordinating social supports for new college students, especially those from low-income backgrounds or who are first-generation students.
Education policy developments at the federal level may further drive the need for greater impact investing. Planned cuts to federal education funding by the Trump administration provide further argument for innovation in the nonprofit and philanthropic sectors. As federal resources decline, new kinds of capital are needed to make up the difference.
When it comes to impact investing for higher education, Kresge and Lumina's statement to other funders through this report is, "Water's warm; come on in." The two funders are moving to put skin in the game and are challenging other funders to do likewise.
One foundation to watch closely in this space is Gates, which already has a long track record of using program-related investments to advance its mission, including in both K-12 and—in a very limited way—higher education.