With burdensome student debt becoming a more likely outcome than a viable job prospect for many Americans pursuing a degree, state lawmakers are fighting to restore public trust in their institutions by promising to hold them more accountable. An increasingly popular tactic is dangling money over the heads of its two- or four-year institutions—or both—through performance-based funding models.
While the model has recently drawn fanfare from policymakers, some higher education leaders and the public, others argue that it will not only fail but also backfire. Leaders who’ve absorbed its common pitfalls believe they’re capable of creating a model that effects positive change.
Growing popularity of performance-based funding
While various performance-based funding models have existed since the 1970s, recent state proposals arguing for its use suggest a new wave of interest. In Pennsylvania’s blueprint to overhaul its current higher education system, Gov. Josh Shapiro made performance-based funding one of the three essential pillars to help boost enrollment and graduation rates, especially for its first-generation students. Last summer, Texas and Oregon agreed to implement similar models for their two-year institutions.
Additionally, two- and four-year higher ed systems that have adopted hybrid funding models that mix base formulas with performance metrics have exploded by an average of 775% between fiscal years 2004 and 2020, according to an April 2023 report by InformED States, a clearinghouse for policy analysis.
Rather than states basing money allocation explicitly on school enrollment or a system-wide base-adjusted formula, performance-based funding judges institutions on whether they meet certain metrics. Oregon is focused on improving the participation of underrepresented students, while Texas wants to award institutions that confer a high rate of credentials for high-demand jobs.
However, performance-based funding is not only a darling among lawmakers. Penn State President Neeli Bendapudi voiced her great pleasure in its implementation across Pennsylvania, where per-student funding ranks 49th in the country, according to state representatives.
“I have been a strong advocate for performance-based funding in higher education, not only to enhance transparency and accountability but also to achieve meaningful outcomes for our students,” she said in a statement.
Similarly, 65% of Texas residents approved of two-year institutions’ performance metrics determining their funding, according to a poll funded by the Bill and Melinda Gates Foundation and Educate Texas.
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Ignoring the evidence
Despite the recent proliferation of performance-based funding models, numerous reports over the past decade have found inconclusive evidence that performance-based funding helps institutions improve any desired metrics. Tennessee and Ohio, whose performance-based models account for more than 50% of their overall money allocation, failed to outperform other states in most areas of degree productivity, according to a peer-reviewed study published by ResearchGate. Moreover, researchers suggested that after six years of implementing the model, the two states were less productive in producing associate degrees.
Furthermore, a seminal report by HCM Strategists found that performance-based funding models “remain[ed] mostly disconnected from attainment needs, with little or no reflection of student progress and degree completion” across Tennessee, Ohio, North Dakota and Nevada.
“It seems to be a policy that doesn’t go away despite the overwhelming evidence that it’s not very effective,” says James Dean Ward, principal of policy and economic research at Ithaka S+R, an academic research firm that has also published similar findings.
Exacerbating current issues
Aside from the evidence suggesting institutions will fail to move the needle with this funding formula, Ward believes it may also drive institutions to cultivate bad behaviors. For example, a funding formula that rewards institutions for credential completion might motivate admission officers to disproportionately favor white and Asian students, demographics that have historically excelled in college.
Similarly, AAC&U President Lynn Pasquerella believes outcomes-based models focused on credentials completion will indirectly punish institutions doing much of the legwork to “serve the underserved,” such as HBCUs and minority-serving institutions.
“The whole intent of this legislation is undermined by the reality that we have disinvested in public higher education over the past several decades,” she says. “Institutions serving students who are the most at risk of dropping out would be disadvantaged by the policies intended to enhance completion and graduation rates.
“It’s no surprise that places like Penn State would support [these models] because highly selective research institutions are the primary beneficiaries. They are not the ones that need the most help with performance.”
Performance-based funding models that only analyze students’ career outcomes will have disproportionate effects on institutions situated around declining youth populations and far from economic hubs, noted Bryan Penprase, vice president of sponsored research and external academic relations at Soka University of America. One such example is isolated rural institutions dedicated to providing education “for its own sake,” Pasquerella says.
“Corporatizing” student success
Others point to how performance-based funding sidesteps the mission of liberal arts colleges. Karnell McConnell-Black, the vice president for student life at Reed College in Oregon, believes the metrics tied to the model focus too closely on the short-term, “corporatizing” what student success should look like.
“It’s so directed toward high-profile jobs. At Reed, however, our success metric is centered around students living a life of passion and purpose,” he says. “The byproduct of that here is that students are going off to get Ph.D.s and going into lucrative jobs.”
Indeed, despite the hyperfocus on prioritizing in-demand, skills-based credentials completion, employers still prioritize applicants who have cultivated strong soft skills, a cornerstone mission of most liberal arts colleges.
“You’ll hear liberal arts degrees are a waste of money, yet those students typically experience the fastest mid-career wage growth among all majors,” John Workman, managing director at EAB, said at the higher education consulting firm’s 2024 “State of the Sector” research webinar. “We read students and families only care about career outcomes, but we know that no one uses [College] Scorecard data and students are scheduling fewer career appointments today than they were in the past.”
Implementing the model correctly
Members of Pennsylvania’s Higher Education Working Group have conceded that the criticism over the past decade from HCM Strategists and other prestigious resources has helped guide the state—and others—into a more informed direction on implementing performance-based funding.
“That research has helped inform states across the country on how to create funding formulas that actually avoid those unintended consequences,” Kate Shaw, deputy secretary and commissioner of postsecondary and higher education for the Pennsylvania Department of Education, said at an education hearing before the state General Assembly in February.
The most important consideration Shaw’s team is implementing in its model is to apply its performance-based model in the context of each institution. To do so, policymakers must consult with each of its institutions to understand its mission and tailor each metric to realistic, achievable goals.
“We know it’s not one-size-fits-all,” Shaw said. “The whole idea of a funding formula is to provide the resources that institutions need to do what we’re asking them to do and then reward them when they meet those goals.”
Secondly, policymakers must consider that under-resourced students require more support services to ensure completion. Hence, schools will need more financial assistance to increase their graduation rates. For example, a $1,000 increase in per-student funding for three years across California’s highest-poverty K12 districts has been found to correlate with a roughly full grade-level increase in math and reading achievements for students in grades eight through 11, according to the Learning Policy Institute.
Lastly, HCM Strategists advise that implementing such models should be smooth enough that they do not result in disruptive shifts in funding, especially in the first few years. To prevent an institution from losing out on a dramatic amount of funding year over year, Ohio and Oregon use a stop-loss provision that prevents them from losing more than a certain percentage of prior-year funding.
Brenda Allen, president of Lincoln University and member of Pennsylvania’s Working Group, takes offense when experts automatically believe HBCUs—like Lincoln—will fail under performance-based funding. Every institution should be held accountable, regardless of the mission it serves or the funding it receives.
“We want to perform like everyone else wants to perform. As long as these models understand the institutional challenges, we should be fine,” she says. “But to say that we would shy away because we don’t like performance funding or that we’re afraid to be held accountable for important things bothers me.”
