Analysis

How to Profit From College Dropouts

Investors are being offered Israel's first social-impact bonds, which pay an attractive return to holders if the universities succeed in graduating more of their students, getting more government aid in the process

Haifa University - Yuval Tebol - May 21, 2012
University of Haifa. Yuval Tebol

It’s hard to imagine a more extreme turnaround in an organization’s vision than that undergone by Aluma. Founded in 1983 by the Religious Kibbutz Movement, in part to encourage and facilitate civilian and military service by young women in the religious Zionist movement, Aluma has become a pioneer in developing and operating programs to reduce social inequality throughout Israel. Target populations include young women, Israeli Arabs and other ethnic minorities and young adults from the country’s geographic and social peripheries.

More Druze women than Druze men have college degrees, notes Lorena Khatib, 20, a second-year sociology student at the University of Haifa from Kisra-Samia, in the Upper Galilee.

“Usually the men work in security, which creates a social problem because the women are more educated than the men, so divorce rates have been increasing,” she says. “I know it will be hard for me to find a partner too, because I don’t want to share my life with somebody who is less educated than I, which limits my choices. I want to have a decent quality of life so I want an educated man with a job that pays well, and there aren’t many like that in the Druze community,” says Khatib.

She has been helped by Aluma, which runs a number of programs aimed at increasing access to higher education for underserved groups, including Arabic-speakers. In high schools, Aluma provides vocational counseling and critical help in preparing for the standardized exam that is an important component in college applications, the psychometric — an almost-unsurmountable barrier for Israeli Arabs.

The second point at which Aluma helps is preventing students already at university from dropping out and the third is finding work after graduation, sometimes through internships in business or public service in their senior year.

Aluma runs five programs to make higher education accessible and prevent dropping out, handling about 18,000 teenagers and students in 90 towns and at 18 institutions of higher education. Its annual budget is 30 million shekels ($8 million), 72% of it from the state.

At the University of Haifa and the Jaffa Academic College, Aluma operates an experimental program to reduce dropout rates, based on the first social impact bond in Israel.

Social impact bonds are a type of impact investing, a philanthropy-investment hybrid that aims to generate returns for investors while supporting social-service programs.

Aluma operates the SIB program at the two institutions for Social Finance Israel. This public benefit company was founded by Sir Ronald Cohen, a pioneer of the social bond who is better known for his association with the Apax investment fund.

Investors in the SIB program at the University of Haifa include the Rothschild Caesarea Foundation, Bank Leumi and donors from Australia. Its goal is to increase student retention in the university’s engineering and sciences undergraduate programs, where dropout rates are about 40% for Jewish students and 60% for their Israeli Arab counterparts, explains the director of Aluma, Yifat Sela.

Sharing the spoils

The goal is to lower dropout rates by 35% at least, she says, which in turn would shore up the educational institutions’ budgets, which are correlated to the number of students. The increase revenue would be shared with investors.

Investment in the social bonds totals $2.4 million for three cycles of students. The estimated savings for institutions from curtailing dropout fares in computer sciences is about 100,000 shekels per student. The economic incentive looks significant. Yet until now, the universities have not had a policy of directly intervening to prevent students from quitting. They should, Sela feels, and set themselves targets not only for student recruitment but dropout prevention. “It can’t be that there are hundreds of students with an F average and nobody cares,” she says. “It’s terribly frustrating.”

In effect, the University of Haifa and the Jaffa Academic College outsourced their dropout prevention activities to Aluma, economically motivating the organization do its best to reduce the rate — the more the rate decreases, the more profit the bond investors will increase.

Accordingly, Aluma has a program devoted entirely to monitoring the state of those two schools’ students in sciences and engineering, locate ones having difficulty and help strengthen them. For this purpose, it signs relevant students on their agreement to obtain their grades. Recently the organization introduced a new midterm examination to evaluate the students and identify ones needing a boost already in the first half of the first semester.

“We don’t wait for them to come to us,” Sela says. “Our advisers personally track each student and give holistic treatment, because the difficulties can be many and myriad.”

Coping with difficult material in higher mathematics and engineering is one thing, but many Arab students, especially, come from low-earning families and have difficulty paying tuition, let alone room and board. Aluma’s counselors help them to find and apply for scholarships, dormitory assignments and rental assistance.

Some Arab students who live nearby commute from home, in part due to financial constraints but also, especially for female students, cultural restrictions against living alone in the city. Commuting by bus or train can take several hours each day, and students face cultural and mental obstacles because of the difference between life in the Arab village and in the Jewish city, and in age. The majority of Israeli Arabs start college at 18, at least two or three years younger than their Jewish counterparts who enter higher education only after their mandatory military service.

Arab students also are typically weaker in English and Hebrew skills than their Jewish peers, and are studying difficult subjects in a second or third language rather than in their native tongue.

Arab participants in Aluma programs indeed report a wide range of difficulties. According to Khatib, who is herself Druze, Arab-speaking students are terrified of the psychometric exam. She enrolled in a one-year mekhina preparatory program at the university, focusing on English, math and study organization methods.

Horrific freshman year

“Even so, my freshman year was horrific. In the prep program, the classes are small. Suddenly you’re thrown into courses with 200 students. The lecturer doesn’t know you and doesn’t take time out to explain.”

“I still have difficulty with the language gap,” says psychology student Lim Boulous, 19, of Kafr Yasif. “I have difficulty understanding the lectures, and there are also Jewish students I would like to mix with, but they don’t let me. I have difficulty approaching Jews to study with them, so the Arab and Jewish study groups don’t really mix.”

Aluma addresses the problem of the study groups at its intervention center at the university, which holds study groups in each of the subjects taught in the first year, including tutoring by outstanding students in more advanced years, and marathon sessions before exams. It also provides moral support.

“The assistants are really important, because they give support,” says computer sciences student Mohammed Khatib, 21, from Arabeh. “They helped me find an apartment, gave me reinforcement after failures and also helped me to speak with the head of department. It’s terribly important to have such support. You feel that you’re not alone.”

“It is important to clarify that we are a social organization,” says Sela, “If we run into a student in difficulty who seems really unsuitable to computer sciences, we could recommend that he drop out, even though that ostensibly diminishes the bonds’ profit. That is why it is crucial for this to be done by nonprofit organizations, not business entities.”

The SIB program has been in place at the University of Haifa and at the Jaffa Academic College for about a year. There is no data yet on dropout rates, but its very existence is a breakthrough, because it forces the academic institutions involved to define a policy on dropout rates, and to measure it, something many do not do.

The social impact bond is a first step in changing the way the universities look at and treat dropouts, due to special intervention programs by the Council for Higher Education in Israel to make higher education accessible to weaker groups, which also provide budgets for preventing students from dropping out. The real incentive is still on its way: 700 million shekels over five years to increase the number of graduates in sciences and engineering by 40%. We may hope it will lead the universities to create structural policy on preventing students from dropping out.