Postsecondary education and credentials are key to economic mobility for individuals and economic competitiveness for our nation. Yet too many low-income adults and disadvantaged youth are locked out of the opportunity to earn credentials and are falling further and further behind. The Center advocates for better policies, more investment, and increased political will to address this national challenge. Learn more »

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Reengineer Education and Skill Development Systems: Federal, state, and local policies can help increase opportunity for low-income adults and disadvantaged youth by connecting education and training systems and funding innovative education and training strategies. Learn More »
Expand Student Financing and Supports: The nation needs robust student financing policies and student support services to ensure more low-income adults and disadvantaged youth complete postsecondary credentials. Learn More »
Increase Investment in Services and Capacity: States and communities can better serve more low-income youth and disadvantaged adults who seek postsecondary credentials by increasing investment in and coordination of funding for education and training. Learn More »
Strengthen Data and Accountability: Education and training systems should work together to better evaluate individual outcomes and improve services for low-income adults and disadvantaged youth. Learn More »

Apr 22, 2016  |  PERMALINK »

Outcomes-Based Funding in Higher Education: Unintended Negative Impacts on Low-Income and Underprepared Students

By Anna Cielinski

Earlier this week, the Community College Research Center (CCRC) announced the forthcoming release of a new book, Performance Funding for Higher Education, in October 2016.  CCRC’s book will include findings that performance funding creates unintended incentives for postsecondary education institutions to restrict the admission of low-income and underprepared students who are less likely to finish college and thus less likely to “pay off” under the institutions’ funding formula.  State policymakers should be careful to design such funding systems with equity in mind and build in guardrails to prevent these unintended consequences. 

This book will add to a growing body of research confirming the concerns CLASP has raised about the potential for state outcomes-based funding, also called performance-based funding, to have unintended consequences for low-income and underprepared students. In principle, measuring postsecondary institutions’ success based on student outcomes rather than enrollments could help to promote improvements in the supports low-income students need to stay in and complete postsecondary education programs. However, without strong safeguards, outcomes-based funding can instead create incentives to reduce access for low-income and underprepared students and unduly punish the open-access institutions that serve them.

A recent paper in the Journal of Education Finance found some evidence that four- and two-year colleges in states with performance-based funding (PBF) policies changed their recruitment strategies to improve their outcomes, likely meaning they will enroll fewer low-income students. Colleges facing PBF received slightly less Pell Grant revenue than colleges in non-PBF states, which may represent a slight shift toward enrolling students from higher-income families.

Similarly, in a 2014 working paper from CCRC, which will likely be included in the upcoming book, researchers asked community college administrators in three states about potential unintended consequences of performance-based funding. The most frequently cited actual or perceived unintended impact was restricting the admission of less-prepared students, in order to bolster graduation rates.

Even more troubling is that these studies both indicate two-year community colleges, which are designed to be open-access institutions, may be driven by the incentives in performance-based funding to close their doors to some low-income and underprepared students who would otherwise have enrolled.

To mitigate the incentives created by performance-based funding for institutions to enroll fewer low-income and underprepared students, state policymakers must take steps such as

  • Providing targeted funding incentives for enrolling and supporting low-income and underprepared students to balance out the negative incentives from performance-based funding without such incentives. Examples include tying funding to a measure for enrolling Pell-eligible students, a measure for graduating Pell-eligible students, and a measure of interim progress or persistence for all students.
  • Differentiating formulas for four-year institutions, two-year institutions, and career and technical colleges, taking into account the unique needs of students in those systems.
  • Putting into proper context any labor market outcomes included in the state’s college funding formula, such as students’ post-college employment and earnings.  For instance, any consideration of students’ labor market outcomes must
    • take into account the variation of earnings across programs of study (e.g., schools with higher percentages of engineering graduates may have higher average initial earnings than institutions with a higher percentage of liberal arts majors);
    • index earnings to regional wage and economic benchmarks (recognizing that different parts of a state may have lower wages, even if the students leaving postsecondary institutions in those regions are succeeding equally well in gaining employment); and
    • take into account the value to society for institutions to offer programs of study that may lead to employment in occupations with relatively low wages (e.g., programs that prepare students to become teachers, social workers, child care workers, and other occupations that provide an important social good, even though their graduates can be expected to earn less than those in other fields).  

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