Aligning Financial Incentives With College Success

Postsecondary institutions have few financial incentives for results. Their funding streams are either divorced from students entirely (through federal research grants or block state funding) or based only on the number of students they enroll (through per-student funding and tuition). This is true at the K-12 level as well, but K-12 schools at least have a regulatory system (like it or not) attempting to drive results. Higher education has neither the funding nor the accountability systems to hold institutions to high standards. While it's not true that institutions have no incentives to graduate students--upper-level students consume far more campus resources than their lower-division peers--they continue to operate as business-as-usual despite roll-the-die odds on college graduation. Institutions are more or less left to their own devices, with all the good and the bad that implies.

States are beginning to experiment with new ways to fund their colleges and universities that hinge funding on student success. This experimentation is a good sign, but it gets tricky really quickly.

Ohio, for instance, is about to adopt a plan to fund its public postsecondary institutions entirely on their ability to retain and graduate students. It's innovative in that the money is not based on pure raw numbers--the state will instead compute "expected" course completion and graduation rates, based on student socioeconomic factors, and reward institutions that meet or exceed these predicted rates. This is much more sophisticated than Ohio's current system of basing funding only on the number of students enrolled on the 14th day of the semester. And, it gives institutions incentives to be accountable for student success.

Yet, Ohio's plan is lacking one significant element: there's nothing to incentivize quality. The opposite is true really, because institutions would have financial motives to make their academic programs easier. More students + lower standards = more graduates = more money. That's not a formula for success.

Ohio is in a position, unlike most other states, to enhance the equation with outcomes data. Its institutions collaborate with the state’s Department of Jobs and Family Services to collect employment data on recent graduates of all postsecondary institutions in the state. The resulting data show the percentage of students who graduated between 2001 and 2006 who were employed or enrolled in more postsecondary education six months after completing their degree, as well as the number of 2002 graduates employed at the end of 2002, 2003, 2004, 2005, and 2006. Six-month, in-state employment numbers of graduates from public universities ranged from 67 percent (Miami University) to 83 percent (Wright State and the University of Akron). Community colleges had some of the highest numbers. Graduates of the Cincinnati College of Mortuary Science were found to be employed and in-state 89 percent of the time and graduates of the MedCentral College of Nursing were at 92 percent.

These data aren't perfect--they discount students who leave the state and give salary numbers for academic discipline but not by institution--but they would nonetheless be powerful in the hands of students and their parents. If such information were aggressively marketed to students and parents, the quality portion of the equation would be driven by student demand rather than institutional prerogative. That isn't possible right now, but it would make the higher education market a whole lot more focused on quality.

In the end, experiments like Ohio's are a real risk for accountability advocates. A bad or misaligned accountability system is worse than nothing at all, and as Ohio policymakers push forward they must be careful to balance quantity and quality concerns together.