Expert Commentary

Performance funding for colleges: Research roundup

2015 selection of research on performance-based funding for higher education, including unintended impacts, an international comparison and a case study involving one historically black university.


For a variety of reasons, funding for institutions of higher education continues to come under intense scrutiny. Some public leaders have pressed for greater accountability among colleges and universities, especially those that receive state or federal funding. In many states, lawmakers have sought to improve institutional effectiveness by creating policies that reward or penalize public colleges or universities based on whether they reach certain goals — for example, boosting their graduation rates or the average salaries earned by recent graduates. These “performance-based funding” policies have become more popular as President Barack Obama promotes a national goal of leading the world in college graduates by 2020.

Historically, public colleges and universities have been funded based primarily on enrollment. As of January 2015, 30 states had begun to tie at least some of the money they give colleges and universities to certain educational metrics, according to the National Conference of State Legislatures. Four other states are working out the details of their plans for performance funding, an idea supported by influential organizations such as Complete College America.

President Obama also supports performance funding and wants to begin linking federal-aid dollars to performance as part of a new college-ratings system that is being developed by the federal government. Under that plan, students who go to higher rated schools could receive more aid, including larger Pell grants.

Key underlying drivers

What precisely is motivating the push toward performance funding? The trend may, in some ways, be linked to the decades-old movement to tie funding to performance at the K-12 level. But it is important to acknowledge that, beneath the rhetoric, there are a number of trends at work. Supporters of performance funding are quick to criticize the size of university budgets, spiraling costs of higher education, hefty debt burdens being placed on students, and myriad programs that are not preparing students for the new economy. While there may be truth in some of those criticisms, the empirical reality is nuanced.

Tuition increases at America’s colleges and universities continue to exceed inflation, although the rate of increases has begun to slow relative to prior decades. Correspondingly, student debt has increased over the past decade faster than other forms of debt and now tops $1 trillion in total, according to the New York Federal Reserve. However, aggregate debt has grown enormously for two reasons: From 2004 to 2014, there was an 89% increase in the number of borrowers and a 77% increase in the average balance size. At the same time, state funding has diminished, pushing more costs onto students and families. The median debt balance for borrowers in 2014 was $14,400, and most had a current outstanding balance of less than $25,000.

Further, even as some graduates struggle to get good jobs, research continues to support the notion that a college degree is an indisputably good investment in terms of increasing potential lifetime earnings. However, only 58 percent of students who began a four-year program in 2004 earned a degree in six years, and evidence suggests that “noncompleters,” in particular, have tremendous challenges in terms of employment and thus loan payback. Student loan defaults also continue to take place disproportionately among those who attend for-profit schools.

Finally, there are vital aspects of universities that may not be fully captured by conventional metrics. As the U.S. National Research Council has noted, federal funding for university research has been “unstable and, in real terms, declining at a time when other countries have increased funding for research and development.” There has historically been a strong connection among fundamental research in higher education, innovation and economic growth; American prosperity and security hangs in the balance as more funding cuts are contemplated, as the National Research Council report notes.

Available research

In any case, educators and researchers continue to analyze the benefits and repercussions of performance-based funding policies. Studies so far offer mixed results, with some scholars questioning whether the approach is a red herring. Despite a long history — performance funding in Tennessee dates back to the 1970s and programs in Missouri, South Carolina and some other states originated in the 1990s — there appears to be limited research on how the trend has specifically affected schools with large minority enrollments, including historically black colleges and universities.

Here is a sampling of research that explores performance-based funding for higher education, its evolution in the U.S. and its impacts:


“Higher Education Governance and Performance Based Funding as an Ecology of Games”
Nisar, Muhammad Azfar. Higher Education, February 2015, Vol. 69, Issue 2. doi: 10.1007/s10734-014-9775-4.

Abstract: “To address the problematic situation of higher education affordability, and literacy, President Obama has recently outlined a new strategy to make colleges more affordable for the middle class. While this strategy includes many components, “Paying for Performance” is a core component of this new strategy. In recent years, states have also focused on performance based policies to influence the behaviour of higher education institutions. However, most impact assessment studies have shown that such policies have had a limited effect on the performance of these institutions. Most explanations given for this failure have been on the basis of principal-agent theory, resource dependence theory and neo-institutionalism. All these analyses tend to view universities in isolation of their real world ecology. Drawing from the insights of ecology of games perspective, this paper explains the failure of performance based funding policies in terms of the inherent complexity of the higher education system. Policy design implications like flexibility, symbolic contextualization and decentralized financial governance for higher education governance are also discussed.”

“Performance Funding for Higher Education: Forms, Origins, Impacts, and Futures”
Dougherty, Kevin J.; et al. The ANNALS of the American Academy of Political and Social Science, September 2014, Vol. 655, No. 1. doi: 10.1177/0002716214541042.

Abstract: “Since the 1970s, federal and state policy-makers have become increasingly concerned with improving higher education performance. In this quest, state performance funding for higher education has become widely used. As of June 2014, twenty-six states were operating performance funding programs and four more have programs awaiting implementation. This article reviews the forms, extent, origins, implementation, impacts (intended and unintended), and policy prospects of performance funding. Performance funding has become quite widespread with formidable political support, yet it has also experienced considerable implementation vicissitudes, with many programs being discontinued and even those that have survived encountering substantial obstacles and unintended impacts. Although evidence suggests that performance funding does stimulate colleges and universities to substantially change their policies and practices, it is yet unclear whether performance funding improves student outcomes. The article concludes by advancing policy recommendations for addressing the implementation obstacles and unintended side effects associated with performance funding.”

“Unintended Impacts of Performance Funding on Community Colleges and Universities in Three States
Lahr, Hana Elizabeth; et al.  Columbia University Community College Research Center working paper, 2014. doi: 10.7916/D8MG7N73.

Summary: “This paper identifies and analyzes the types and numbers of unintended impacts—actual or potential—of state performance funding policies on higher education institutions. The authors conducted telephone interviews with senior administrators, mid-level academic and non-academic administrators, and department chairs at nine community colleges and nine universities in three states: Indiana, Ohio, and Tennessee. This paper discusses the types of unintended impacts that interviewees reported as resulting from performance funding programs, making a distinction between impacts that the authors judge as actually occurring and ones that were stated as possibilities. The unintended impacts most frequently mentioned were restrictions in admissions to college and a weakening of academic standards. Besides documenting main trends, the authors also analyze how interviewee responses varied by state, by type of institution (community college or university), by institutional capacity to respond to the demands of performance funding, and by position the interviewee held in the institution. The paper closes with policy recommendations to address these unintended impacts.”

“Impact of Performance-funding on Retention and Graduation Rates”
Sanford, T.; Hunter, J.M. Education Policy Analysis Archives, 2011. doi: 10.14507/epaa.v19n33.2011.

Abstract: “As the architect of the oldest and most stable performance funding program, Tennessee provides a unique opportunity to analyze the impact of changes in performance funding policies on changes in institutional retention and six-year graduation rates over time. Utilizing spline linear mixed models, this study examines the impact of changes in Tennessee’s performance funding policies on retention and six-year graduation rates at public four-year institutions from 1995-2009. The results show tying retention and graduation rates to performance funding was unrelated to changes in the performance measures over the fifteen year period examined. Additionally, the doubling of the monetary incentive associated with the retention and six-year graduation rate measures in 2005 was not associated with increases in retention rates. These results suggest that at their current funding levels, states’ adoption of performance funding programs, such as the one in Tennessee, may be insufficient to incentivize changes in institutional behavior as desired by state leaders.”

“Impacts of Performance-based Accountability on Institutional Performance in the U.S.”
Shin, Jung Cheol. Higher Education, July 2010, Vol. 60, Issue 1. doi: 10.1007/s10734-009-9285-y.

Abstract: “In the 1990s, most US states adopted new forms of performance-based accountability, e.g., performance-based budgeting, funding, or reporting. This study analyzed changes in institutional performance following the adoption of these new accountability standards. We measured institutional performance by representative education and research indicators — graduation rates and levels of federal research funding. We collected data from 1997 to 2007 and used a hierarchical linear modeling growth curve analysis. The main finding was that states which adopted performance-based accountability did not see a noticeable increase in institutional performance. In addition, we highlighted a critical policy issue—whether state and institutional factors contribute most to institutional performance in higher education.”

“A Historical Mission in the Accountability Era: A Public HBCU and State Performance Funding”
Jones, Tiffany. Educational Policy, May 2015. doi: 10.1177/0895904815586852.

Abstract: “The case study is an analysis of a state performance funding policy at a public historically Black college and university (HBCU). The policy attaches state funding to HBCU performance on measures like graduation rates and equity measures like the reduction in achievement gaps between Black and non-Black students. Participants liked that the policy helped the institution to become more outcome minded, but were critical of the equity measures and their relationship with the state system of higher education. The article addresses how the HBCU’s mission was addressed in the policy and its plans for responding that includes focusing on Latino students.”

“Evaluating the Impacts of ‘New’ Performance Funding in Higher Education”
Hillman, Nicholas W.; Tandberg, David A.; Fryar, Alisa H. Educational Evaluation and Policy Analysis, January 2015. doi: 10.3102/0162373714560224.

Abstract: “In 2007, Washington adopted the Student Achievement Initiative, a statewide performance accountability system designed to improve retention rates and degree productivity among community colleges. Using difference-in-differences analysis, we found that the policy change has had little immediate effect on retention rates or associate’s degree productivity. However, community colleges produced more short-term certificates after the policy reform. These results are robust across many alternative comparison groups. Considering that certificates yield less value in the labor market than associate’s degrees but are easier for colleges to produce, we discuss the unintended consequences of rewarding colleges based on the number of credentials they produce.”

“Keeping up Performances: An International Survey of Performance-based Funding in Higher Education”
Jongbloed, Ben; Vossensteyn, Hans. Journal of Higher Education Policy and Management, 2001, Vol. 23, Issue 2. doi: 10.1080/13600800120088625.

Abstract: “This paper presents an overview of government policies for funding higher education in 11 Organization for Economic Co-operation and Development (OECD) countries. In particular, it describes the mechanisms for funding the university sector and the extent to which the grants to universities are oriented on performance. Are universities funded on the basis of what they produce in terms of graduates and research outputs? And what is the share of public funding supplied through research councils? Although in recent decades the attention paid to issues of efficiency, effectiveness and quality has increased, there are only a few governments that explicitly link universities’ resources to universities’ results in the areas of teaching and research. This is illustrated by means of a graph. A number of tentative reasons for the popularity of enrollments-based funding approaches are presented in the final section of the paper.”

Key words: state funding, student retention, public university, student loans, tuition, research roundup

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