Forget Free College—This Is the Future of Higher Ed

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Long before COVID-19 tuition lawsuits, a partisan divide over the value of education had already emerged. While progressives often claim that higher education is underfunded, many conservatives are increasingly skeptical of its value to students and taxpayers.

Properly formulated, performance-based funding (PBF) for higher education can reconcile these views.

Since 1979, PBF has allowed states to fund public institutions of higher education based on a school’s value-add to students, taxpayers, and legislative goals. Last year, thirty states used some variation of the formula.

Despite its prevalence, nearly all current PBF models have major flaws. In some, the measured outcomes are easily gamed by schools – at times to the detriment of student success. Graduation rates, for example, can be increased by lessening the rigor of coursework, directing students toward easier degrees, or accepting fewer students from disadvantaged backgrounds. In other instances, funding formulas are simply too complex, or states allocate too little funding, to change behavior.

Earnings-based funding, on the other hand, is PBF with a focus on one primary outcome: the earnings of students who previously attended the school. The more successful students are in their careers after school, the more funding a school receives. Schools with the best methods are then able to use their extra funding to help more students succeed.

Texas State Technical College (TSTC) is the only higher education system in the U.S. that has adopted a fully earnings-based funding model. “Gone are the days when it was just presumed that a dollar spent in education was a good dollar,” said TSTC system chancellor Mike Reeser. “Under our new system, we don’t get a dollar until we’ve made that student successful in the workplace, so the best interests of the institution are actually linked to the best interests of the student.”  Since 2014, placing more students in higher-paying jobs has generated a 117% increase in combined graduate earnings.

Funding models partially based on earnings have also become more prevalent in recent years. Since 2004, for example, Kansas’s community and technical colleges have maintained performance agreements with the state. Current metrics include retention and graduation rates, students employed or transferring, and wages of students. Kansas’s performance-based funding amounts to less than 5 percent of state funding for community and technical colleges, yet the earnings of Kansas graduates have steadily increased over the past decade. Since 2010, earnings from short-term certificates increased $3,000 per student, earnings from long-term certificates increased $6,000, and earnings from associate’s degrees increased $3,000.

Since 2014, about 25 percent of overall state funding for Florida’s public university system has been performance-based. The funding formula contains twelve metrics, including median wage of graduates, graduation rates, retention rates, and degrees in subjects important to the state. Since 2014, the median wages of Florida students one year after graduation have grown immensely: in 2015, the median annual wages of graduates from Florida universities ranged from $30,000 to $35,100; in 2021, they range from $33,500 to $44,800.

In 2018, California community colleges adopted a Student Centered Funding Formula containing eight metrics that control 10 percent of state funding. These metrics include degrees and certificates awarded, successful transfers to four-year schools, and attaining a regional living wage.

Even in 2021, earnings-based funding continued to pick up speed in state legislatures. Notably, Florida HB 1507, sponsored by Representative Yarborough and Representative Melo, bases two-thirds of performance-based funding for Florida College System industry certificates on student wages. As part of a comprehensive workforce-training package, the bill passed the House and Senate unanimously.

Any model can be modified to fit state needs or accommodate specific schools’ unique missions. As a starting point, the Cicero Institute suggests measuring both short-term and long-term earnings, and including low-income student enrollment and low-income student earnings to determine a school’s share of state funding. Including low-income student enrollment and earnings encourages schools to do their best to help students from disadvantaged backgrounds find financial freedom after graduation.

Public higher education should provide a measurable and substantial return on investment for students and taxpayers. Earnings-based funding is quickly catching on as a solution to achieve this end. As more states adopt it, new data will only bolster its case.

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