Should college funding be tied to how many students graduate?

Editor’s note: Performance-based funding – a policy where a portion of state funding for public colleges and universities is based on how well they perform – is gaining in popularity. Colleges are often judged by their graduation rates in performance-based funding formulas. Here, Denisa Gandara, an assistant professor of higher education at Southern Methodist University, explains the appeal behind the policy, as well as its potential pitfalls.

1. How many states have adopted performance-based funding and what is the appeal?

At least 30 states are using some version of performance-based funding for colleges and universities. Although these policies are widespread, most performance-based models only link a very small portion of state funds to performance metrics.

Performance-based funding for higher education is not new: The first performance-based funding model was adopted in 1979 in Tennessee. In general, there have been two waves when performance-based funding was implemented – 1979 to 2000 and 2007 to present.

In the past 13 years, state policymakers have shown a renewed interest in performance-based funding. This is even after numerous states abandoned it in prior years, in part because of shrinking state budgets and loss of public support for the policy.

The resurgence of performance-based funding in the U.S. is being driven by two things. First, there has been a growing national interest in college completion. Second, the Great Recession led policymakers to demand publicly funded institutions – including colleges and universities – to do more with less. Performance funding was viewed as one way to get college leaders to improve outcomes.

2. Is there any evidence that performance-based funding works?

I call performance-based funding policies the “zombies of higher education.” I say this because they seem to be the higher education policies that no amount of evidence can kill.

Typically, performance-based funding policies are adopted with the goal of increasing college completion rates. Although the policies do lead college and university leaders to focus more on helping students finish school, numerous studies show that performance-based funding has not been effective at improving college completion rates.

One potential reason for this is that colleges and universities are complex organizations where numerous actors play a role in promoting student success. But not all of these actors know about or “buy in” to performance-based funding. For instance, in Tennessee, faculty and staff at a regional university felt that the performance-funding system was designed to benefit the University of Tennessee, Knoxville. In a different study, I found that some college leaders in Texas who opposed performance funding were aware of research that shows that performance-funding has not led to improved college completion rates. Other research has also found that faculty and staff resist performance funding. This resistance sometimes leads college leaders to ignore the policy altogether or to circumvent the policy, such as by manipulating data.

Also, some colleges may not have enough resources or capacity, such as staff, technology and expertise, to improve completion rates.

If a performance-based funding policy punishes these lower-resourced schools for lower performance by decreasing their funding, it could make it harder for the schools to boost their performance. For example, in the only public Historically Black College and University in Tennessee, Tennessee State University, funding dropped by 0.23% per year on average in the first five years of performance funding. This is compared to an increase of 1.49% per year on average for other universities in the state. These trends have raised concerns among researchers and higher education observers that with these funding cuts, schools that serve students of color and lower income students might not be able to serve students well.

3. Are there other unintended consequences?

Researchers have found numerous consequences associated with performance-based funding that can negatively affect certain groups of students and the colleges and universities they attend.

For instance, some performance-based funding policies seem to make colleges and universities more selective. That is to say, they admit students that they think have a higher chance of graduating. This increase in selectivity in turn leads to lower admission rates, higher SAT/ACT scores, fewer low-income students and fewer students of color. These findings are based on a comparison of average trends for schools with performance funding to average trends for schools without performance funding.

So performance-based funding could actually be making it harder than it already is for these groups to get into college.

One way to lessen the chance that performance-based funding will decrease access for low-income students and students of color is to add extra funding for schools to serve those groups. There is also some evidence that institutions increase supports for those groups, such as by offering mentoring programs for students of color, when there is extra funding tied to their success. Yet, many peformance-based funding models don’t provide extra money to improve outcomes for low-income students and students of color.

Performance-based funding policies also tend to favor more selective institutions by distributing more funding to those institutions. These institutions start out better positioned to perform well on the metrics that matter in performance-based funding, in part because they spend more money per student. This higher spending per student leads to higher completion rates.

Also, performance-based funding models may penalize minority-serving institutions if the models consider employment outcomes. This is because graduates of color generally fare worse in the labor market because of their race. So, if a school is punished under performance-based funding for having poor employment outcomes, it’s like punishing the school because of racial discrimination in the job market.

Interestingly, when a school has more political influence, performance-based funding might not see the light of day if the model would cut funding for their institution. This is because colleges and universities often have input into whether and how performance-based funding gets implemented. This happened in Iowa and West Virginia, where performance-based funding was killed because the proposed model would cut funding for the state’s main universities.

Performance-based funding doesn’t always hurt schools with large numbers of students of color and lower income students. For instance, in Texas and Washington state, minority-serving two-year institutions were not subjected to less funding after performance-based funding took effect. This is because the funding models gave relatively low weight to outcomes, such as graduation, and instead focused on rewarding student progression, such as how many credits a students completed. In addition, in both Colorado and California, performance-based funding actually helped institutions that serve greater shares of students of color and low-income students by design. In Colorado, policymakers passed performance funding, which social justice advocates viewed as favorable to underserved students, in part by framing it as an accountability policy. Since performance-based funding is so popular, policymakers were able to redistribute funding in a way that helped institutions some people viewed as underfunded.

What the evidence shows

Research has generally shown that despite the good intentions behind it, performance-based funding has not lived up to its promise to improve college completion rates. It has also led four-year colleges to make it harder for low-income and minority students to get into college. This could actually reverse the progress that has been made in making college more accessible.