Report: Performance-Based Funding May Harm Low-Income Students

By Allie Bidwell, Communications Staff

Performance-based funding has become an increasingly popular way to hold colleges and universities more accountable for the outcomes of their students. But a new study suggests some schools may be responding to performance-based funding (PBF) policies by enrolling fewer low-income students.

In a paper released this month, Robert Kelchen and Luke Stedrak of Seton Hall University examined how two-year and four-year institutions changed their practices for allocating revenues, expenditures, and financial aid in response to state performance-based funding policies. Kelchen and Stedrak used multiple data sources, including information from IPEDS to track institutional-level financial measures from the 2003-04 through the 2012-13 academic years.

“The logic behind PBF programs is that colleges and universities are using their resources inefficiently, spending too much money on areas such as research and auxiliary enterprises at the expense of core instructional activities,” the paper said.

While Kelchen and Stedrak found limited evidence of institutions receiving different levels of revenue or reallocating expenditures, they did see a difference in Pell Grant revenue between colleges subject to these policies and those not subject.

Research on the effectiveness of performance-based funding policies and whether it has an impact on student outcomes has been a mixed bag. But the results from Kelchen and Stedrak’s new paper suggest schools may be strategically enrolling students from higher-income families who may have better outcomes, such as retention and graduation rates, as a way to skirt the rules.

Another way schools could work to increase their outcomes while maintaining or increasing revenues is to minimize the amount of financial aid they dole out to keep the net price higher, or to devote more funds to instruction, while increasing tuition and fees to increase revenue, according to the paper.

Through their analysis they found four-year colleges facing performance-based funding policies received about $30 less per full-time student in Pell Grant revenue than schools in states without performance-based funding policies, which represented about 2 percent of typical per-student Pell Grant revenue in 2012-13, the paper said. Two-year colleges subject to performance-based funding received approximately $39 less in Pell Grant revenue per student.

“This appears to represent a slight shift toward enrolling students from higher-income families, which could be a function of enrollment management policies or student preferences between public four-year colleges in states subject to PBF compared to other institutions,” the paper said.

Kelchen and Stedrak also found an increase in unfunded grant aid, which is often merit-based aid, at four-year colleges in states with performance-based funding policies. This could also suggest those schools are trying to recruit high-achieving students from wealthier families. New America has documented how some schools are increasingly using the way they allocate institutional aid as a tool to recruit high-achieving students from higher-income families.

While the results suggest public colleges that are subject to performance-based funding policies might be strategically changing the configuration of their student bodies, Kelchen and Stedrak note that more research is needed to determine whether these changes are due to institutional behaviors, or other factors.


Publication Date: 4/6/2016

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