Missouri Bill would fund public colleges based on graduate earnings


The vast majority of freshmen say they go to college “to get a better job” and “to be able to make more money.” But too many degrees do not increase student income enough to justify the costs of college. A group of Missouri state lawmakers want to change that by changing the incentives facing public colleges and universities.

The University Rewarding Workforce Readiness Act, introduced by State Senator Karla Eslinger and State Representative Mike Henderson, would directly tie funding for public universities and community colleges to their students’ earnings after enrollment. Schools that offer higher average incomes to their students would receive more state funding. The plan aligns the schools’ financial incentives with their mission of expanding economic opportunity for young Missourians.

How the proposal works

Under the proposed framework, each of Missouri’s nine public universities and thirteen community colleges would receive a performance score based on several indicators. The indicator with the highest weight would be the average annual income of students six to ten years after their first registration at the institution. All students who are currently employed and not pursuing higher education would be included in this average.

The performance score also gives schools credit for enrolling more students who receive Pell Grants, a federal scholarship program for low- and middle-income students. Institution scores increase if they enroll a higher proportion of Pell students and produce higher average earnings specifically for students who receive Pell grants. These provisions address concerns that the funding formula would incentivize colleges to enroll only wealthier students who have high pre-existing earning potential.

Four-year universities and community colleges would be subject to the new formula. But four-year schools would also get credit for placing graduates in public service jobs such as law enforcement and social work. Universities can also improve their scores if a greater proportion of their alumni are working or pursuing higher education.

After the Missouri government calculates each university’s performance scores, it multiplies the scores by the number of students enrolled at each school. The product determines the annual appropriations of each state government institution. Schools that perform better, as measured by performance score, receive more funding per student.

For example, the State Technical College of Missouri is a public community college that offers several high-value programs such as Registered Nursing and Electrical Technology. According to estimates prepared by the Cicero Institute, the school’s annual appropriation would increase between 10% and 23% by 2027 if the performance funding formula were adopted.

The college could use this new revenue to reduce tuition and attract more students to its high-paying vocational programs. Alternatively, it could use the funds to develop high-value but expensive programs like nursing. Importantly, Missouri State Technical College would be incentivized to continue offering high-earning programs for graduates, just as other institutions in the Missouri system would be encouraged to expand programs that produce outstanding economic results.

Performance-based funding works, with the right targets

The idea of ​​tying state funding to college performance is not new. Most states have some sort of performance-based funding formula that determines some or all of their public colleges’ annual credits. But Missouri’s plan is unique in that its primary measure of college performance is also its most important: how much students earn after leaving school.

According to Third Way, most existing performance-based funding formulas are based on metrics like graduation rates and credit hours earned. Although these are important outcomes to measure, they are vulnerable to manipulation. There have been instances of schools producing more certificates at short notice or lowering academic standards to increase their completion numbers.

Labor market outcomes are only occasionally used in performance funding formulas, and even then, measures such as placement rates or graduate graduation rates are the most commonly measured outcomes. These are beautiful things to care about. But revenue is most relevant to students, and revenue is also the metric that schools are least able to manipulate. Employers will not pay top dollar to hire students whose credentials have no value in the job market.

A model for Missouri’s plan is Texas State Technical College, a community college in the Lone Star State that receives 100% of its public funding from a formula based on graduate earnings. The experiment was a huge success. After the school moved to a revenue-based funding formula during the 2010s, the school closed 13 underperforming educational programs and reallocated resources to more in-demand degrees and certificates.

Although closing the programs was a “difficult decision”, according to Chancellor Michael Reeser, “we have decided that we would rather take a temporary reduction in enrollment than offer programs that lack strong employment value for students”.

The results speak for themselves. Texas State Technical College graduates saw their starting salaries increase by 26% between 2009 and 2017, while the number of students placed in jobs increased by 65%. In recognition of these results, the school received a 45% increase in state funding.

Unlike the Texas formula, the Missouri plan is not based entirely on graduate earnings. Fifty-five percent of the university performance score and 70% of the community college score are based on income, while the remainder is determined by the proportion of students receiving Pell grants and other factors. Still, Missouri’s plan is a huge step forward that will fundamentally change the incentives facing public colleges in the state.

Improvement areas

There are ways to improve the plan. For one thing, the proportion of students receiving Pell grants is not the best predictor of low-income student enrollment. A large number of middle-class students receive the scholarship, meaning institutions can increase their Pell shares without necessarily enrolling more low-income students. Additionally, if Congress increases the maximum Pell grant (as it did this week), the number of high-income Pell students would increase while the number of low-income Pell students would remain about the same. Missouri’s funding allocations would change even if schools did nothing to improve revenues or enroll more low-income students.

Fortunately, there is a solution: give students who receive larger Pell grants more weight in the funding formula. Pell Grant scholarships are means-tested, so a low-income student receives a larger scholarship than a middle-class student. Rather than weighting all Pell students equally, the formula could weight a student receiving a $6,000 Pell grant six times more than a student receiving a $1,000 Pell grant. This gives more weight to truly low-income students and limits the extent to which institutions can improve their performance scores by enrolling more students from low-income families.

Pell’s question, however, is a minor issue. Overall, Missouri’s plan is a strong proposal that would encourage colleges to improve their earnings performance and give more students a chance at middle-class careers. Hopefully, this will be one of the first of many proposals to tie more state and federal funding for colleges to whether they are fulfilling their most important mission: expanding economic opportunity for American students.


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