Dive Brief:

• 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.

Dive Insight:

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.