Putting Money Where the Mouth Is

Ways to build momentum for college completion

Among policymakers at the federal and state levels, as well as within the philanthropic community, there is an overdue awareness that the U.S. and its constituent states need a more highly educated citizenry and workforce. The country is already well behind several other countries in the proportion of its young adult population that has attained a college degree. President Obama has stated as a goal, making the U.S. the leader internationally in education attainment by 2020.  This is being interpreted as being first in the world in proportion of 25-to-34 year olds with a college degree by 2020. To get there from the current position will require a 4.4% annual increase in degree production, according to calculations by NCHEMS. This is ambitious but not impossible. If we wait, and hold 2020 as the target year, the necessary rate of increase goes up.

The size of the education attainment gap between the U.S and some competitor nations is large and growing. Closing the gap–if addressed immediately–will stretch the higher education system. Unfortunately, this growing consensus about a system performance goal comes at a time when higher education revenues are increasingly constrained. Tax revenues available to states have fallen by record amounts, and it is unlikely that cuts in appropriations to higher education will rebound to prior levels in the foreseeable future. The response to state fiscal woes has been to sharply increase tuition. But there are limits as to how high tuition can go before sticker prices become an economic barrier (real or perceived) to the very students who must participate in, and complete, higher education programs if national attainment goals are to be met.

The higher education enterprise is faced with difficult choices. It can:

  • Reject the goals and serve the number of students that reduced resource levels will allow.
  • Accept the goals, and attempt to increase revenues (largely through tuition increases) to levels that will allow additional numbers of students to be served.
  • Recognize that productivity enhancements will be required and find ways to serve more students more effectively with the resources available.

Clearly, the latter is the preferred choice. But if institutions are to change their behaviors in ways that will lead to productivity improvements, state policy will have to be better aligned with the completion and productivity agendas.

Building blocks of sound fiscal policy

In all states, state governments decide how much of their budget goes to direct support of institutions and how much to student financial aid. In some states, elected officials also set (or must approve) tuition levels; in others, tuition policy is within the purview of institutional governing boards. Legislatures also affect institutional finances by mandates regarding the use of institutional resources devoted to student financial aid. In some cases, this takes the form of requiring that institutions waive tuition for certain groups of students (war veterans, families of protective service personnel killed in the line of duty, etc). In other cases, states put limits on the use of tuition waivers.

This simple diagram masks a great deal of complexity in higher education finance policy. Multiple components comprise each of the individual “arrows” in this diagram: numerous different student programs, multiple pieces to the institutional support policies and different policies as they relate to different groups of students (in-state, out-of-state, undergraduate, graduate, etc.). The trick is to ensure that:

  • The pieces of finance policy align with each other—the gears mesh, not clash.
  • The policies align with state goals, particularly the goals of increased degree productivity.

Given the lack of attention given to alignment of the pieces, the fact that different policies are often the responsibility of different decision-making groups, and the different constituencies that line up behind different parts of the policy framework, it is little wonder that coherent policy is hard to achieve. The secret is aligning policy with goals; if this can be accomplished, aligning the various components with one another other becomes much easier.

Supporting completion and productivity

The centerpiece of state finance continues to be the state appropriation for general institutional operations. As students carry a larger and larger share of the burden of financing public postsecondary education, the emphasis may shift to finance and student-aid policy. As of yet, however, this shift has not occurred. Recognizing that the preponderance of state funding flows directly to institutions in the form of a general fund appropriation, ensuring that this component of the overall fiscal policy framework promotes increased educational productivity is of overriding importance.

All approaches to funding institutions have embedded in them incentives for institutional behavior. This is true despite the fact that most funding mechanisms were put in place to sustain institutions and make sure they were treated “fairly” in the resources allocation process, not to achieve any well-articulated public goals. The primary incentives inherent in most funding models are enrollment growth and acquisition of assets.

  1. Enrollment growth. Regardless of specifics, most funding models reward institutions for enrolling more students, whether the reward comes directly through enrollment-driven formulas or indirectly through the arguments made in support of increases to base funding. Helpful as these approaches have been in promoting student access, they include disincentives for student success and productivity. The institution intent on maximizing revenues would enroll as many students as possible, increase the numbers of credits required for graduation, and make it difficult to transfer credits from other institutions. While institutions seldom fully exploit these perverse incentives, there have been few economic reasons not to do so. At the extreme, an institution would enroll everyone it could and graduate no one.
  2. Acquisition of assets. For those institutions funded on some variation of a “base-plus” model, the incentives are to keep acquiring assets (faculty, staff, buildings) thereby increasing the size of the base that becomes the starting point for subsequent budgets. Inadvertently, the incentive is for lowering productivity, not increasing it.

With an understanding that finance policy is the strongest lever available, state policymakers are beginning to change the methods used to allocate resources to institutions. These changes are explicitly designed with the college completion goal in mind; indirectly, increased degree production accomplishes the objective of improving productivity. [Note: the author knows of no state that directly rewards institutions for improving performance on a productivity metric.] The states at the forefront of these changes—Indiana and Ohio—have worked within the framework of their old resource allocation mechanisms, but made some game-changing modifications in the details:

  • The big change is shifting from course enrollments to course completions as the basic driver of the resource allocation model. By focusing attention on completions at the course level, they help ensure that students make more rapid academic progress. They also reduce expensive “wastage” in the instructional process, staffing for classes that are of the desired size at the beginning of the term but much smaller at the end. In other words, if institutions staff to an opening enrollment of, say, 40 students in a class, and then students drop after the funding census date and the class ends up with 20 or 30 students, the actual faculty teaching load and productivity go down proportionately. The objective is to make sure that much larger percentages of students who sign up for a course actually finish it. You can’t complete a degree program if you can’t complete the courses.
  • The second change is the more intentional use of set-aside incentive pools—an old idea redirected to new purposes—to increase the numbers of graduates (often with specific characteristics such as students who are from low-income families, entered as at-risk students, or got degrees in high-priority fields). They also recognize the unique circumstances of community colleges, rewarding institutions when students reach momentum points such as successfully completing developmental education and enrolling in college-level courses, accumulating 15 and 30 credit hours and transferring after accumulating a specified number of hours.

The most radical proposal for changing a resource-allocation model is one put forth by a consortium of community colleges in California. They offered to accept an arrangement in which their entire state appropriation would be based on a predetermined fixed payment for each graduate produced. In return for their willingness to accept a pure pay-for-performance funding model, they asked for regulatory relief from a plethora of policies that limit their ability to become more productive. The enabling legislation was narrowly defeated, but the effort will most assuredly be renewed.

The important features of the initiatives described above have the essential features of working within an established funding approach and embedding incentives in the base component of the state allocation, not just an ignorable add-on. Similar changes are working their way through the process in Texas and Tennessee; Washington has been the pioneer in creating incentives for achievement of momentum points.

While the main focus continues to be placed on state allocations to students, the alignment of tuition and student aid policy with completion and productivity goals is becoming more and more important as the burden of instructional support shifts to students. The old model of maintaining affordability by keeping tuition low no longer works. California’s community colleges are the best case in point. With tuition (fees, in their language) at about $20 per credit hour or $600 per year, their student fees are by far the lowest in the country, so low that they can’t generate sufficient revenues to provide needed capacity. An estimated 200,000 students are being denied access. And at that price, students feel no compunction to stay enrolled in a class; they aren’t losing much personally if they drop a course and in the process, they drive productivity downward.

Good policy in this arena has certain important characteristics:

  1. It keeps tuition and student financial aid policies inextricably linked. Conditions under which the two are decided independently are increasingly dysfunctional.
  2. They make need-based aid a state responsibility, not an institutional one.
  3. They incorporate the full cost of attendance, not just tuition, in the student cost calculation.
  4. They recognize that students are being forced to work to pay their way through college. Good policies serve to limit the amount required to levels that don’t jeopardize academic progress and success.
  5. They allow institutions tuition flexibility with conditions that they become responsible for additional need-based aid if they raise prices above a policy-driven determination of appropriate cost of attendance.
  6. They take full advantage of federal aid programs, both Pell and tuition tax credits. No federal money is left on the table.

By far, the best design for an integrated tuition/financial aid policy is that of Oregon’s Shared Responsibility model.

These policies serve the completion and productivity goals by helping keep college affordable and removing barriers to student success. Other polices focus more directly on conditions for student success. Several states have scholarship programs that reward students for taking high school curricula that prepare them for college and for continuing to make academic progress once enrolled in college. The Georgia Hope, Florida Bright Futures and Louisiana TOPS programs are the best known of these programs. All have the flaw of ignoring need in the calculation. Their resources are going to students who are likely to succeed anyway; growth in degree production among students who wouldn’t otherwise succeed isn’t promoted. The best design of a program that encourages completion of those less likely to enter and stay engaged in college is Indiana’s Twenty-First Century Scholars program, which has demonstrably enhanced college completion of low-income students at relatively little cost.

There are other ideas being bandied about that would have an even more direct impact on student completion and productivity. The most interesting is the idea of direct payments to students who complete degrees and take fewer than the catalogue required credits in the process (though advanced placement, dual credit, testing out of courses, etc). Anything that reduces demands placed on the postsecondary system by students who successfully complete college programs enhances productivity.

Final thoughts

While there are many variations on the themes presented in this piece, there are two critical bottom-line conditions:

  • Finance policy must be explicitly tied to goals. Money (and the conditions under which it is allocated) is the most important policy tool available at the state level. If funding policy explicitly or implicitly sends the wrong—or mixed—signals, intended outcomes will most assuredly not be reached.
  • The three pieces of finance policy—institutional support, tuition and financial aid—must be part of an integrated package. Failure to be consistent across these elements will inevitably reduce levels of goal attainment.

In getting these ducks in a row, it is useful to diagnose the incentives embedded in the current allocation mechanisms. If you were an institutional leader or a student, what would you do to maximize the benefits you would receive under the current ground rules? Are these behaviors consistent with the attainment of completion and productivity goals? Finally can the existing model be changed in straightforward ways to create alignment or is a complete overhaul required?

Change to fiscal policy in higher education is hard work. Even small changes threaten someone. The good news is that we know what needs to be done, even in these tough economic times. What’s needed is leadership with the will and the skill to actually get it done.


Dennis Jones is president of the National Center for Higher Education Management Systems, based in Boulder, Colo. He wrote “Pumping the Money Lever: Why state approaches to higher education finance need an overhaul” in the Winter 2009 issue of The New England Journal of Higher Education.


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