man_tablet_ChristensenInst_HigherEd

Innovative programs need innovative funding models. What could they look like?

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Dec 5, 2018

This piece is from a larger discussion on higher education regulation that originally appeared on EducationNext. Check out Part 1 here, Part 2 here, as well as the full piece and a corresponding perspective by Kevin Carey, Director of the Education Policy Program at New America.

Why does the US have the most expensive higher education system in the world—but also one in which prestigious institutions are struggling to keep pace internationally, and average institutions are struggling to serve students well domestically?

Because you don’t just get what you pay for—you get how you pay for it. 

The current funding model for higher education is pay-for-enrollment, meaning that colleges receive money for every student they enroll. That money may come from the student, a parent, a scholarship provider, or a government, but the school gets to keep it—even if the student fails their courses, drops out after the end of the semester, doesn’t go on to finish their degree, or isn’t able to use their education to get a job that enables them to pay off their loans. 

Pay-for-enrollment isn’t the only way. There are other options to structure how we pay for college. Most of them involve paying schools for some sort of outcome. Outcomes-based funding models could change institutional behavior in ways that benefit students—and could replace a complex and arcane regulatory framework that has limited innovation, and been ineffective at protecting students and taxpayers from waste, fraud, and abuse. 

Policymakers should embrace new funding models; incentives will drive institutions to innovate in ways that benefit students far more effectively than a long list of rules ever could. The authors of the next Higher Education Act (HEA) reauthorization cannot reasonably be expected to create definitions that will remain relevant through the next decade of technological change and business-model evolution. Focusing on outcomes instead will allow higher-education providers to innovate.

Start innovating with funding models—using innovative programs

This type of regulatory approach could be applied broadly across higher education to beneficial effect. But one can anticipate that traditional institutions will fight and try to water down these new regulatory attempts. For political reasons, innovative programs must, therefore, serve as the guinea pigs for such policies—doing so would be in their own self-interest and would also advance higher education overall. In exchange for the freedom to operate as they see fit (that is, with waivers from input-based regulations) and still receive federal financial aid, innovative programs would be funded based on their outcomes—which is how functioning consumer and business markets ultimately operate. Providers that innovate and deliver outcomes tend to grow, while those that innovate but don’t deliver will fade. Over time, as innovative providers gain market share and serve more students, and as we learn which outcomes-based funding mechanisms work best with the fewest unintended consequences, the policies can be extended to more of the postsecondary market.

This approach could take a variety of forms, and Congress could use the Experimental Sites Initiative, which waives certain regulations for colleges and universities running experimental programs, to test a variety of schemes and investigate their various impacts and unintended consequences. Currently, there is a dearth of research on the impact of different financial-aid mechanisms on student outcomes.

For example, Congress could authorize risk-sharing, whereby colleges would have to repay some financial-aid dollars if students default on their loans. This trial could comprise a set of experiments that test the effects of varying percentages of risk on the college’s part. 

Congress could also experiment with income-share agreements—arrangements in which students pay back a set percentage of their future income for a limited period of time—where, through a similar risk-sharing mechanism, some college revenues would be contingent on a student’s future earnings. To illustrate how this might work: If a program was eligible for $50,000 in federal financial aid to educate one student, it would receive only 75 percent of that sum up front. When the student graduated, she would begin paying back the federal government a certain percentage of her salary—perhaps 10 percent over a set number of years. Once the student had paid the government $50,000, the institution would receive the remaining 25 percent of the federal money. 

Congress could also make funds more available to providers that produce relatively strong outcomes, which would create more liquidity for programs that deliver a higher return for students and would naturally guide students toward them. This last step would move beyond the current gainful-employment rule—which was an important first move toward outcomes-based accountability—because access to funding wouldn’t be based on whether a program cleared an arbitrary debt-to-income ratio of its graduates but on the performance of a program relative to that of other schools and on actual market conditions.

All of these funding models would provide incentives for colleges to ensure that their programs are adequately preparing students to succeed in today’s labor market. Transparency around outcomes broken out by demographic segment and information about why students attended those institutions would make it possible for students to make college decisions based on the results.

Alana leads the Institute’s higher education research and works to find solutions for a more affordable system that better serves both students and employers. In this role, Alana analyzes disruptive forces changing the higher education landscape.