(Charles Mostoller)

Performance-based school-funding systems are a good idea in theory, but they need to be more carefully designed, to discourage chicanery.

The troubling dropout rate across American colleges and universities is starting to get the attention it deserves. Earlier this year, always eager to mobilize the armies of social reform, the New York Times declared “a new dropout crisis.” As 2 million students drop out of college each year, the costs should give everyone pause — including a half-trillion dollars in unpaid student debt and public subsidies wasted on college-goers who never graduate.


Policymakers have sought to answer the challenge, with most states adopting performance-based funding policies. Currently, 32 states allocate a portion of their higher-education funding based on educational outcomes. Ohio, for instance, allocates more than half of its funding to colleges based on how many students earn degrees. Other common metrics including retention and job-placement rates.

There’s a lot to like in these efforts. For one thing, they have been fueled by state policymakers rather than mandates from Washington. For another, at a time when tuition costs keep rising and concerns about academic quality keep proliferating, performance-based funding could bring healthy accountability to higher education. It makes sense that colleges that successfully graduate more students should receive additional state aid, while those with higher dropout rates receive less. This promises to align incentives so that institutions have a stake not just in enrolling students but in seeing that more of them actually complete their degrees.

So, what’s the problem? Well, the truth is, these funding systems are more alluring in theory than in practice. Unless engineered with great care — not the kind of thing for which New York Times–endorsed reform crusades are known — they can reward colleges for the wrong things. After all, not everyone who starts college should finish. Urging colleges to issue degrees to students who can’t or won’t do the requisite work is a recipe for wasteful, costly degree inflation. Indeed, encouraging colleges to find ways to graduate more students, whatever it takes, can incentivize them to churn out watered-down degrees or admit only the students who seem like the safest bets.


As No Child Left Behind and the recent spate of graduation-rate scandals have made all too clear at the K–12 level, an undue focus on reaching crude benchmarks can lead educators to cut corners or manipulate data. The pressure to graduate students, for example, can lead to lower standards, grade inflation, and even outright fraud. Unsurprisingly, when big dollars are at stake, colleges sometimes succumb to the same unsavory temptations. And the very university mandarins who have tolerated rampant grade inflation, kowtowed to woke student mobs, and energetically worked to game college rankings hardly seem like ideal candidates to police such mischief.


Indeed, when protected by anonymity, college administrators have already sounded alarms about how their institutions are responding to performance-based funding policies. In 2014, researchers at Columbia University surveyed over 200 senior college administrators across three states and reported that many believe that institutions are responding in troubling ways. Back then, more than a quarter of respondents were already fingering performance-based funding as the cause of a decline in academic rigor, from reduced coursework demands to decreased degree requirements to students steered into “easier” classes to grade forgiveness.


Scholarly research also raises red flags. Last month, a new meta-analysis conducted by scholars at the University of Oklahoma and the University of Wisconsin found that performance-based funding has not actually yielded gains in graduation rates or other metrics. The authors observe that researchers have not had success linking “performance-based funding policies to increased college completion rates,” note that analyses “consistently show primarily null findings,” and conclude that “performance-based funding has no effect on completion, on average.”

Some might look at those research findings and decide that there’s no problem — that, if even campus bureaucrats inclined to cook the books can’t manage to effectively do so, these policies are harmless, at worst. But that’s an unduly cheery perspective. The reality is that these policies are encouraging unhealthy behaviors while doing precious little good. If the No Child Left Behind crackup taught us anything, it’s that policymakers ought to be deliberate when using simple educational metrics for accountability.



The point is not that performance-based funding systems need to go, but that they need to be overhauled with much more careful attention to their design, the incentives they create, and the mechanisms they include for ferreting out chicanery. There’s a need for careful auditing, and a need to ensure that these systems reward good colleges rather than those whose bureaucrats know how to game them. Little of that yet exists. And, crucially, this means that — despite the emerging sense that something should be done — these problems ought not become fodder for Washington-based solutions next year if, as some suspect, Congress finds a way to move forward on reauthorizing the Higher Education Act. After all, watering down standards, pushing students who haven’t done the work through college, and restricting opportunity aren’t what anyone has in mind when talking about addressing the dropout crisis.

— Frederick M. Hess is the director of education-policy studies at the American Enterprise Institute (AEI) and the co-editor of the new AEI-Third Way volume Elevating College Completion. Cody Christensen is a research assistant at AEI.

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