- As more states weigh the merits of performance-based funding for public colleges and universities, a report from nonprofit Third Way examines their impact amid a heightened national focus on college completion, greater accountability for degree-granting institutions and fewer available state dollars.
- As of January 2016, 25 states used performance funding and five more were developing such policies, though the report notes that tracking these initiatives can be difficult. Less than 10% of state funding to colleges was based on student outcomes in 2015. General declines in state funding have made it difficult to determine the effect of performance-based funding measures.
- The report points to research showing that performance-based funding does not usually lead to higher graduation rates. Instead, it can encourage colleges to push short-term certificate programs rather than longer-term degrees, and could increase selectivity and weaken academic standards. However, the programs also can spur positive institutional changes, such as more student advising and interventions.
As Third Way’s report notes, common outcomes tracked through performance-based funding measures include student retention and graduation rates, transfer rates from two- to four- year institutions, credit hours completed, degrees conferred and job placement.
Recent research has pointed out critical flaws in the design of performance-based funding programs. The implementation of more aggressive funding reward systems has resulted in some community colleges turning their focus on graduating students from shorter-term certificate programs rather than associate degree programs, echoing Third Way's conclusions. These shorter programs have been shown to offer limited returns in the labor market when compared to longer-term options such as two-year degree programs.
Other research has shown that performance-based funding has a negative impact on minority-serving institutions, and that continued use of such a model could alter the missions of these institutions.
Another researcher points to Indiana as an example of a state that offers varying conditions for an institution to receive performance-based funding. Public colleges in the state receive $6,000 for every low-income student who completes a bachelor's degree, which is less than the $23,000 reward for getting the student to complete within four years. However, it does encourage institutions to evaluate the quality of their recruitment and admissions processes.