Performance-Based Funding Produces Mixed Results

The federal government currently provides more than $150 billion each year to students and their families in the form of grants, loans, work-study funds, and tax credits to help make college more affordable. This sizable public investment in higher education has indeed made college attendance possible for a larger share of Americans. However, there is growing concern in Congress on both sides of the aisle over whether these funds are being used effectively to help students receive a high-quality education at an affordable price tag.

The vast majority of federal financial aid is distributed through a voucher system, with money following students to the eligible college of their choice. Both students and colleges must meet basic performance standards in order to receive funding. Students must make satisfactory academic progress, which colleges generally define as a 2.0 grade point average and completion of roughly two thirds of all credits attempted. Colleges must meet minimal quality thresholds, which include accreditation by a federally recognized agency and a student-loan default rate below 30 percent. While a large percentage of students (especially at community colleges) struggle to maintain academic eligibility for federal funding, very few colleges are eliminated by the institutional requirements.

Washington policymakers who are frustrated by these minimal accountability standards for colleges can turn to the laboratories of democracy—the states—for other ideas. One policy that has been adopted in nearly 40 states is performance-based funding, which ties at least a portion of state appropriations for public colleges to student outcomes such as degree or certificate completion. Should Congress also use degree completion as an accountability metric, including such a provision when reauthorizing the Higher Education Act? While the idea has promise, it also presents potential pitfalls.

An Effective Policy?

For an accountability system in higher education to be effective, three conditions must be met. First, tying funding to student outcomes must result in changing institutional behaviors toward practices and approaches that support positive outcomes. Second, colleges must be able to influence the outcome of interest, which would require reaching students by working with a large number of faculty and staff members who may not be directly affected or incentivized by the policy. Finally, the amount of money linked to student outcomes must be substantial enough to get colleges’ attention and change their actions.

When it comes to the possibility of tying federal or state funding to student completions, these conditions are met to varying extents. A number of qualitative studies have found that colleges subject to performance-based funding have boosted their data analytics and academic advising services in an effort to improve student success, which suggests that colleges are able to re-prioritize some resources with the aim of earning additional public funds. The second condition—the ability to influence the desired outcome—is trickier to meet, as students may have 40 different professors and interact with dozens of staff members over the course of a bachelor’s degree program, and it is difficult to identify those who were instrumental in getting the student to graduation. In regard to the final condition—the amount of funding in play—most states that have performance-based funding policies allocate only a relatively small portion of their higher-ed money (less than 10 percent of it) on the basis of outcomes. Throw in institutional provisions designed to mitigate year-to-year revenue fluctuations, plus the reality that state funding is only a small part of many colleges’ budgets, and many institutions ultimately have only 1 or 2 percent of their budget at stake in a given year.

Research examining the effectiveness of performance-based funding policies has generally found modest effects—both positive and negative—of linking state funding to the number of college completions. This trend of mixed effects holds across states, for both two-year and four-year colleges, and for varying shares of state funding tied to student outcomes. Some emerging evidence suggests that long-established state policies may be more effective than newly implemented ones, but more research is needed to fully understand how specific nuances of these policies are associated with student outcomes.

Unintended Consequences

One concern with any accountability system derives from Campbell’s Law, which states that, over time, any quantitative measure used for making decisions is likely to “distort and corrupt the social processes it is intended to monitor” and become less valuable. This means that if colleges discover ways to game performance metrics, at least some of any observed upturn in performance under an accountability system is likely not real improvement.

One potential effect of using degree completions as a federal accountability measure is that colleges may lower their standards to allow more students to graduate. A new working paper by Jeff Denning and his Brigham Young University colleagues suggests that a portion of the increase in college completion rates since 1990 may be attributable to lowered standards (but not to students switching to easier majors). Without seeing additional research, I am agnostic on the question of whether academic standards have fallen over time (I went to college in the mid-2000s and earned my share of Bs and Cs), but it is worth noting that the issue of graduation rates first became visible to the public in the late 1990s and early 2000s without being tied to funding for most colleges. Therefore, it is unclear whether linking a portion of funding to college completions will result in any additional lowering of standards beyond what has already happened.

In the community-college sector, another concern is that institutions may shift students from associate-degree programs to shorter-term certificate programs in an effort to increase completion rates. Even if the quality of the education provided does not change, it is easier to complete a one-year certificate program than a two-year associate degree, simply because the latter takes longer and requires more persistence. Several studies examining performance-based funding systems have found that colleges did respond with this tactic, and that is a concern, because longer-term degree programs tend to have a higher labor-market payoff than shorter-term programs. (On how certificates and degrees can work together, see “A Certificate, then a Degree,” what next.)

Colleges may also seek to recruit and enroll students whose success is virtually guaranteed, which threatens to exacerbate enrollment gaps by race/ethnicity and family income at selective colleges. (Most colleges admit more than 50 percent of applicants and are not considered selective.) Research has shown that performance-based funding systems have resulted in heightened admissions standards and reduced diversity at selective institutions, which has led more than 15 states to provide bonus funds for colleges when they graduate students from traditionally underserved populations.

Degree Attainment on the Rise (Figure 1)

Political Prognostications

The proportion of U.S. 25- to 34-year-olds holding a college degree has grown 25 percent over the past decade, to nearly 48 percent in 2019 (see Figure 1). That’s far short of the 60 percent goal set by the Obama administration in 2009, and much of the increase can be attributed to a rise in enrollment rates. Given the lackluster improvement in college completions, along with rising student-debt burdens, policymakers across the ideological spectrum are hesitant to give more money to colleges without tying at least a portion of it to student outcomes. While performance-based funding is often viewed as a policy favored by conservative legislators, deep-blue California adopted such a system in 2018, and New Jersey is in the process of developing one. Therefore, it seems likely that Congress will pair any increase in federal spending on student financial aid with some type of outcomes-based accountability system.

Still, I seriously doubt that Congress and the Department of Education would be willing to allow colleges with subpar completion rates to lose funding. State performance-based funding systems often protect colleges from such losses by using hold-harmless provisions or basing only new funds on student outcomes. The federal government also has a long history of waiving sanctions for low-performing institutions, especially those that are politically popular, such as community colleges and minority-serving institutions. The Department of Education under President Obama recalculated student-loan default rates at the eleventh hour of his administration, protecting federal aid eligibility for a number of colleges; and in 2017, Republican senator Mitch McConnell introduced a rider to protect a community college in his home state from default-rate sanctions.

The Obama administration’s failed effort to link federal funding to student outcomes shows the political difficulties of implementing a federal accountability system, even though most states already have such systems in place. In 2013 the administration proposed the Postsecondary Institution Ratings System, which would have tied federal funding to access, affordability, and completion outcomes. This plan was quietly abandoned in 2015, but it did result in an expanded College Scorecard that provides potential students with information on an institution’s student-loan debt, repayment rates, and earnings. The resulting focus on student-loan repayment has resulted in multiple proposals from both Democrats and Republicans to hold colleges accountable for a portion of loans that are not repaid, but none of these plans has received serious discussion in Congress.

Finally, I believe that divisions between Democrats and Republicans on this issue—which have only grown wider during the 2020 presidential campaign—will be a main stumbling block to reauthorization of a comprehensive Higher Education Act, which is not likely to happen until at least 2021. Issues such as income-driven student-loan repayment plans, campus free speech, and sexual-assault investigations have gotten more public attention, but differences over whether accountability policies should focus on for-profit colleges or cover all sectors equally are likely to doom reauthorization. This means that for the next few years, discussions about tying federal funding to student outcomes are likely to be no more than academic exercises.

This piece is part of the forum, “Should Congress Link Higher-Ed Funding To Graduation Rates?” For an alternate take, see “Congress Must Address Dismal Dropout Rates” by Lanae Erickson.

This article appeared in the Winter 2020 issue of Education Next. Suggested citation format:

Kelchen, R., and Erickson, L. (2020). Should-Congress Link Higher Ed Funding To Graduation Rates? Debating the use of degree completion as an accountability metric. Education Next, 20(1), 68-75.

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