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Frequently Asked Questions Outcomes-based funding

College and universities focus a lot of attention enrolling students. But after students sign up for classes, less effort and attention are given to helping them earn degrees, certificates and other credentials. Many students who enroll in college finish their studies and graduate, but many students who are racial and ethnic minorities, who are from low-income families, who are the first in their families to attend college, or who are adults never complete their educations. Fully 60 percent of Asian Americans have a college degree, as do more than 44 percent of whites. But only 20 percent to 28 percent of blacks, Hispanics and Native Americans have earned college degrees, according to the most recent U.S. Census figures.

Outcomes-based funding is especially meant to benefit at-risk students, who often leave school in debt and without degrees and good job prospects. It aids these students by encouraging colleges and universities to focus more heavily on providing support and clearing obstacles to help them earn meaningful credentials.

When public money flows to colleges and universities based primarily—or solely—on the numbers of students enrolled, institutions understandably focus on recruiting new students rather than on adequately supporting the students they have. In addition, enrollment-driven state financing creates unintended consequences because, as students advance to upper-level courses and become more costly to serve, they can be easily “replaced” by less-costly freshmen and sophomores.

Outcomes-based funding recognizes that underrepresented students require additional academic, financial and social supports to succeed. Such programs also acknowledge that incentives are needed to ensure it makes financial sense for colleges and universities to educate students as they progress to upper-level coursework.

Lumina Foundation believes well-designed approaches to public financing of higher education balance the priority of ensuring college access with the societal imperative of increasing the number of Americans with high-quality degrees and other credentials beyond high school.

Outcomes-based funding, although not perfect, is a significant step toward ensuring that taxpayers’ significant investments in higher education result in more graduates.


What is Outcomes-Based Funding?

What does outcomes-based funding do?

Outcomes-based funding uses public money to encourage colleges and universities to increase the numbers and percentages of students who earn high-quality degrees, certificates and other credentials. It funds colleges and universities based on how well they perform on key metrics. The increases in numbers of students who earn degrees at public colleges and universities should lead to a national increase in education attainment.

How does outcomes-based funding create change?

When funding is based on outcomes, colleges are encouraged to focus more on helping students succeed in their programs of study. With this form of funding, state policymakers send clear messages to colleges and universities that more must be done to ensure that students who enroll in college actually graduate—and that they graduate on time. Research indicates outcomes-based funding leads to significant, new conversations within colleges and universities about how to improve student results.

Does design matter?

Yes, how funding models are designed has a great deal to do with their effectiveness. To ensure sustainability, outcomes-based funding should be a part of each institution’s funding base and should not be an “add-on” that can disappear during periods of political change or economic recessions. Outcomes-based funding also should include incentives to graduate underrepresented students. In addition, such funding should recognize year-over-year increases in the numbers of students each institution graduates.


How Does Outcomes-Based Funding Help Students?

Why is it important that students complete?

A high school diploma is no longer enough to guarantee a living wage. For this reason, students really must finish the postsecondary education they start. In addition, the rising price of college means students who enroll but don’t complete can find themselves with low-paying jobs and responsibility for monthly payments on sizable student loans. People who earn bachelor’s degrees on average make $800,000 more during their lives than people who went college but failed to graduate.

How does outcomes-based funding ensure that students’ needs are met?

Students themselves obviously play important part in whether they graduate. But research strongly suggests there is also a great deal that colleges and universities can do to structure programs in ways that make it more likely students will complete their studies. For example, students often need help understanding the importance of taking course loads that will allow them to graduate on time, how to choose academic majors and pathways, how to register for courses, how to effectively use their pre-college time to prepare academically, and how to transfer previously earned academic credits. Students also need help understanding and managing their finances, loan terms and options, and paying for fees, books, housing and other costs. Sometimes, students cannot take the courses they need to graduate because classes are full or are not regularly offered. In states where outcomes-based funding has been adopted, colleges have sought to address these needs by improving or creating new programs. These colleges have extended registration cut-off dates to allow more time to open up additional sections of courses if needed, revamped student advising and counseling, improved and streamlined financial aid procedures, increased financial aid for low-income students, mandated first-year courses that provide guidance and promote student success, hired staff to help pre-college students prepare for college-level coursework, and developed automatic systems to alert students if they are falling behind on course requirements.


How Does Outcomes-Based Funding Help Colleges and Universities?

How have colleges and universities traditionally been funded?

College and universities receive most of their funding for teaching and learning from taxpayer support and student tuition and fee revenue. In traditional funding systems, public funding is allocated based on student enrollments or how much state or local operating support each college or university received the year before, plus inflationary increases. Tuition and fee revenue also are closely tied to student enrollments. Policymakers’ interest in increasing enrollments arose in the wake of World War II as more Americans sought college educations and with the advent of community colleges. Enrollment-based funding helped to dramatically expand the availability of higher education during this postwar period.

Why do we need options beyond enrollment-based funding?

This approach has created incentives for institutions to focus primarily on signing students up for programs and courses and on maintaining institutional enrollments. Perversely, it also has served to discourage the retention of students as they move into more costly, upper-level coursework.

As a result of enrollment-based funding, other policy choices, student interest, and labor-market demand for graduates, college enrollments have grown significantly in the United States in recent decades—from 2.2 million in 1950 to 19.9 million today. However, this decades-long concentration on growing enrollments drew attention away from the staggering numbers of students who fail to complete their educations. The cost of these failures—to students, families, taxpayers and society—is huge, a massive pool of unrealized potential. In the United States today, only 58.8 percent of students who enroll full-time in college immediately after leaving high school complete bachelor’s degrees within six years. (In contrast, the national high school graduation rate hovers near 80 percent, and draws far more scrutiny.) At community colleges, which admittedly serve a number of missions other than producing graduates, the numbers are even bleaker. Just 31 percent of first-time, full-time students finish their associate degrees or certificate within three years.

Low graduation rates pose the greatest harm to students who can least afford to enroll, take on debt that cannot be discharged, and fail to earn credentials that lead to further education or employment. Most often, these students are racial and ethnic minorities, are from low-income families, are the first in their families to attend college, or are working adults.

Why is outcomes-based funding an improvement?

Outcomes-based funding includes many of the features of traditional funding. For example, to the extent colleges and universities charge tuition, a portion of their revenue will always be tied to enrollment. Outcomes-based funding builds on the legitimate focus on college access by tying funding to whether students actually complete educational programs after they enroll. Most well-designed outcomes-based formulas account for inputs such as student demographics and academic preparation; process outcomes such as course completion, transfer and student success in remedial coursework; and outcomes such as graduation rate increases, year-over-year increases in numbers of degrees and credentials awarded, and results such as students passing professional licensure exams and finding employment related to their programs of study.

How can incentives that colleges and universities offer for students to finish their programs complement outcomes-based public funding?

Some colleges and universities that receive outcomes-based funding also offer tuition, financial aid and other incentives to students to encourage on-time completion of academic programs. For example, flat-rate tuition can be used as part of a strategy to persuade students to take full course loads. Also, summer tuition discounts can be offered to encourage students to maintain continuous enrollment, which has been shown to increase the likelihood of degree completion.

In addition, state and institutional need-based financial aid can be structured in ways that encourage students to pursue on-time degree completion.


What Are the Results of Outcomes-Based Funding?

How are colleges responding to outcomes-based funding?

Colleges generally have responded to outcomes-based funding by: adjusting their budgeting process to spend more on students; removing academic, financial and social barriers that students face gaining entry to college and advancing toward degrees; and providing better student supports such as tutoring or counseling. Research has found outcomes-based funding leads to:

  • Slightly more spending on instruction and slightly less on research.
  • Significant changes in academic support such as improved developmental or remedial education, tutoring and teaching resources for faculty; changes to student service policies, programs and practices such as the removal of “graduation fees;” improved use of computer data to identify and design better paths to completion.
  • Improved awareness among college leaders of how they can better support students.

What are some specific examples of reforms?

In the state of Washington, community colleges adopted new policies to help encourage students to complete their academic programs. These policies included eliminating certificate and diploma fees; improving remedial, or developmental, education and tutoring; and performing special audits to identify and award degrees to students who had fulfilled degree requirements but for whatever reason had never officially graduated. In Florida and other states, academic departments and staffing were altered to improve students’ ability to progress through their courses of study in a timely fashion. Courses and instructional techniques were changed in several states, including Missouri. North Carolina made changes to plan, organize and deliver academic instruction in ways better suited to students’ needs. Policymakers in Ohio and Tennessee say outcomes-based funding has helped college and universities improve course transfer policies for students, which also reduces the expense of excess credit accumulation.

Do results depend on how outcomes-based funding is designed?

Yes; a funding model’s performance is directly related to how well it is designed. Unfortunately, much of the academic research on this topic does not distinguish between relatively recent, well-designed funding systems and those enacted before 2005, which usually were known as “performance-based funding” or “performance funding.” Performance funding models typically did not put enough money at stake to generate results; created budget “add-ons” or “bonuses” that were not sustained; failed to recognize and reward indicators of student progress or intermediate achievements such as course completion and credit accumulation milestones; featured unnecessary complexity in terms of metrics tracked; and were often cut short because of political or budgetary considerations. Studies of performance-based funding have found mixed results; however, even some of the early models that did not emphasize course or degree completion appeared to produce results. The lessons learned from performance funding models—some of which were unsuccessful—helped shape the development of newer, outcomes-based funding approaches. The results of performance funding are important to study, but this research has little to say about whether newer, better-designed outcomes-based funding models built on lessons from these earlier models will succeed.

Well-designed outcomes-based funding has several key elements:

  • It is part of the base institutional budgets rather than an “add on” or “bonus.”
  • It recognizes year-over-year increases at colleges and universities in degree or credential completion and student progression.
  • It recognizes that at-risk students are more costly to educate, and it provides financial incentives for institutions to support them through degree completion.
  • It puts enough money at stake to influence actions and behavior at colleges and universities.
  • It factors in the unique missions of specific institutions, such as community colleges, four-year comprehensive universities and research universities.

Is outcomes-based funding leading to increased education attainment, especially among underrepresented students?

Outcomes-based funding “encourages campuses to prioritize student success.” Well-designed outcomes-based funding systems oriented toward annual increases in numbers of graduates by institution—such as those in Indiana, Ohio and Tennessee—are a relatively recent development; they have not been in place long enough for rigorous quantitative analyses to answer this question definitively.

Still, early indicators are promising. For example, the annual increase in bachelor’s degrees awarded by Tennessee colleges and universities rose by 73 percent, from 2.6 percent in 2010 to 4.5 percent in 2011, after outcomes-based funding took effect. This rate of increase is significantly greater than neighboring states without outcomes-based funding. During the same period, Tennessee also saw a 282 percent jump in the growth rate of associate degrees awarded, from an annual increase of 2.8 percent statewide to 10.7 percent. The number of workforce certificates awarded also increased, but more research is needed to determine the value of these credentials. Research in other states with outcomes-based funding indicates that it may take several years to see effects but that outcomes-based funding could lead to increases in the number of bachelor’s degrees awarded.

However, preliminary research and analyses, as well anecdotal evidence, suggest that basing a proportion of public funding on whether students actually finish their programs prompts an institutional response, regardless of whether the amount at stake is perceived as significant by colleges and universities. Researchers have found that, in states with outcomes-based funding, colleges and universities engage in serious reflection and review of their student services, whether they are academic, financial or social. Substantial qualitative research also reveals these system-wide or campus-level reviews and discussions prompt institutions to shift from passive approaches to monitoring student progress to instead proactively putting in place evidence-based practices to improve the likelihood that students from all backgrounds will graduate. These are desired outcomes, but because this is a new area of emphasis for many colleges and universities, many of these programs are instituted without knowing the ideal combination of resources and outreach necessary on the front end to substantially increase the numbers of graduates. Also, in response to performance funding, no colleges or universities have radically redesigned their academic programming in affordable, cost-effective and holistic ways designed to dramatically improve learning and student outcomes.

What Does Well-Designed Outcomes-Based Funding Look Like?

What does an outcomes-based funding model measure?

Well-designed outcomes-based funding metrics are intended to focus on making sure that students receive the support they need to graduate on time. Well-designed funding models measure whether students are earning credits and “making progress” toward earning bachelor’s degrees, associate degrees, certificates or other credentials. Besides progression and completion, metrics might gauge whether students graduate in a timely and affordable manner or are receiving high-quality educations. These metrics also create incentives for institutions to close equity gaps in education attainment.

How does outcomes-based funding recognize differences between institutions?

No two colleges or universities are alike. They might have different types of students, resources or needs. Some might have special missions to serve certain types of students or to provide certain types of educations. Colleges that are very different should be evaluated differently. For example, a community college should not have the same metrics as the state’s top research university. In this instance, outcomes-based funding for the community college might emphasize associate degrees, while outcomes-based funding for the university might focus on bachelor’s degrees.

What should colleges and universities aim for?

Rather than asking colleges and universities to aim for all-or-nothing goals, several states have found it is better to encourage steady, incremental improvements. All-or-nothing goals create strong incentives for colleges and universities to “game the system” to make sure they meet their goals. A model that rewards modest but steady progress recognizes institutions that perform better this year than the year before. This also can lead to more stable and predictable funding, in part because metrics go beyond mere enrollment, making it easier for colleges to plan ahead, budget efficiently and sustain improvement.


Where Has Outcomes-Based Funding Been Put into Action?

Where has outcomes-based funding been implemented?

Key stakeholders around the country are increasingly working toward adopting outcomes-based funding. Please see Lumina’s Strategy Labs website for up-to-date information on what steps states are or can be taking to implement outcomes-based funding.

Is outcomes-based funding the same everywhere?

Outcomes-based funding differs from state to state, and even among types of schools within a state. As a result of differences, some models might work better than others.

For example, in Maine’s funding model, four-year universities receive additional funding for students who earn degrees in science, technology, engineering, math and nursing. In the state of Washington, community colleges receive additional funding for students who complete apprenticeship training programs. In Florida, wages earned by in-state graduates is factored into funding decisions. The Louisiana funding model allocates funding based, in part, on how well graduates perform on professional licensure and certification exams.


Is Outcomes-Based Funding Entirely About Outcomes?

How will enrollment continue to play a role under outcomes-based funding?

Most outcomes-based funding models deal with only a portion of state funding to colleges and universities. The remainder of state funds for higher education institutions continue to be distributed through enrollment-based models. In addition, colleges can earn more tuition and fees by increasing enrollments. This means that even in states and higher education systems in which 100 percent of public money is tied to outcomes, colleges and universities will still have financial incentives to increase their enrollments.

Does outcomes-based funding change how much funding higher education receives?

The goal of outcomes-based funding is to allocate public money in ways that help ensure that more students graduate. Implementing outcomes-based funding does not necessarily change how much a state spends on higher education. In fact, no new money is needed, but outcomes-based funding changes how those public funds are divided among campuses. The total level of funding may increase or decrease regardless of the results of an outcomes-funding model.

How does outcomes-based funding improve how services are provided?

Outcomes-based funding models should reflect as much of each college’s mission as possible, but it is impossible to take everything into account. Colleges and universities provide a wide array of education and other services to their students and communities, many of which have never been directly funded or reimbursed. With outcomes-based funding models, these services are more likely to continue if they can be shown to improve student outcomes.


What Else Do I Need to Know?

Does outcomes-based funding result in lower-quality education?

Changes to higher education, however great or small, are often accompanied by concerns that education quality will be eroded. So far, researchers have found very few instances of outcomes-based funding leading to lower standards. Grade inflation existed before outcomes-based funding and can be measured. Any tendency toward increased selectivity in admissions can be addressed through monitoring institutional outreach to high schools, placement test cut score changes, and standardized test results such as the SAT or ACT scores of entering freshmen. In most instances, faculty members represent the ultimate check on quality, and they can be aided by well-defined learning outcomes and competencies that students are expected to achieve to earn degrees in specific disciplines.

What are the next steps in outcomes-based funding?

The numbers of students completing college are increasing, but additional rigorous quantitative research is needed to understand the effects of outcomes-based funding. As well-designed outcomes-based funding systems are implemented, colleges and universities will adapt and develop new programs, plans and business models to help students succeed. These developments will require further research to learn which practices, programs and interventions work best. Outcomes-based funding models might eventually include long-term metrics that measure how students fare five or 10 years after completing college. Finally, outcomes-based funding will encourage better and more robust data collection, which could open new avenues for assessments to ensure institutions are adequately supporting students who enroll with the intent to one day graduate.