Aligning Student and Institution Incentives in Higher Education Finance
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Introduction

Higher education creates and transmits knowledge, provides opportunity and social mobility, trains skilled workers, and drives economic development. It is also a complex, $600 billion business providing paychecks to 4 million people.

Sometimes what colleges and universities must do as businesses is consistent with their academic goals. But often they must choose money over mission. The financial transaction that produces most educational revenue in the United States is essentially “cash-for-credits.” Students pay for instruction by the credit hour—roughly one hour of classroom instruction per week for the length of a full term.

“Cash-for-credits” does not, however, provide a sustainable foundation for other priorities, including:

  • Focusing on low-income students.
  • Offering courses in high-cost technical and scientific disciplines.
  • Investing in advising and long-term academic planning.
  • Giving students credit for their work at other institutions.
  • Coordinating with potential employers.

Recommendations

Proposals to reform higher education financing should start with understanding the range, size, and variety of current revenue sources and incentives. Proposed reforms won’t work unless they are appropriately sized, timed, and aligned with institutions’ and students’ other priorities and incentives.

State legislatures, systems of higher education, private foundations, and the federal government are increasingly interested in testing new ways to pay institutions and support students. Key types of reform include:

  • Using outcomes-based appropriations to close funding gaps, especially regarding degree completion and service to low-income students.
  • Changing tuition and financial aid to support short-term choices (enrolling in summer or taking 15 credits per term, for example) that help students meet long-term goals (such as completion).
  • Changing the emphasis from the service being “sold” to a focus on major milestones, actual learning, and completion.

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