Social impact bonds are a new approach to financing certain governmental activities that generate cost savings to state, local, or federal governments.  In an environment when raising taxes is difficult, public finance entrepreneurs are promoting the use of social impact bond financing to encourage cost-effective programs and promote innovation in the delivery of social services.  Social impact bonds, sometimes called human capital bonds, pay for performance bonds or pay for success bonds, are considered appropriations bonds rather than general obligation or revenue bonds.  Repayment is contingent on the successful outcomes from a social program that lowers government costs or raises government revenues.  Cost-benefit analysis is central to existence and implementation of these bonds as the rates of return depend critically on the existence of benefits greater than costs.  Since first offered in the UK in 2010, these bonds have caught the attention of many state governments and the U.S. Departments of Justice and Labor where they are being promoted for use in financing recidivism and job training programs. 

Several rigorous longitudinal studies have followed participants of high-quality preschool programs into adulthood and have reported sizeable net benefits for both participants and society as a whole.  In his State of the Union address, President Obama included the findings of these studies in his discussion of the importance of promoting and expanding early childhood education programs.  However, while the benefits of these programs exceeded the costs by $7 to $1 or more, a close look at the findings in these studies reveals that policymakers and taxpayers have to wait 15 years for the benefits to cover the costs.   This long payback window makes preschool programs less attractive than other preventative social programs such as recidivism or job training programs when being considered for financing through the use of social impact bonds. 

Newer evidence, however, suggests that the benefits of current targeted, high-quality programs may accrue earlier and maybe be larger than in previous studies.  Specifically, an early benefit of cost saving resulting from preschool participation for children at risk of schooling difficulties is a reduction in special education expenditures.   In this paper, we calculate the payback time period for early childhood education based on newer data on special education costs for students in the Chicago Public Schools.  Using a combination of actual preschool results and projections of possible results, we discuss the assumptions required to shorten the payback window to different time periods (such as 8, 10, or 12 years.)   Evidence of the existence of a shorter period over which costs are recovered will provide useful evidence on the suitability of social impact borrowing for financing early childhood interventions and other preventative social programs.