Implications for policy and practice:

1. Outcomes-based funding (OBF) can focus institutions on student outcomes but, without other efforts, is unlikely to solve state credential attainment shortfalls. Most research shows past and existing OBF models alone have had little to no effect on overall credential attainment. Presumably, additional tools are needed to address credential attainment shortfalls. Recent models link greater portions of funding to outcomes and include other innovations.
2. OBF premiums can prevent unintended consequences and change targeted outcomes. Premiums for credential attainment within populations with historically lower college completion rates can mitigate unintended consequences and preserve access for students with lower likelihoods of success. While the research is still nascent, OBF premiums for STEM fields have been found to increase credentials in those fields. State policymakers aiming to shift students into specific fields of study or to encourage institutions to continue serving students from these populations should consider such premiums.
3. OBF may change the political dynamics of higher education state funding in some states. State policymakers who value higher education accountability may be more supportive of increased state appropriations for colleges when that funding is tied to outcomes. The potential for increased funding may also be an effective way to bring college stakeholders to the table around funding model reform.
4. States should plan to evaluate and refine OBF models over time. States continue to explore innovative strategies for using an outcomes-based formula. By actively investigating the outcomes of their OBF policies, state policymakers can both refine their models and contribute valuable insights to the research base on OBF as an evolving policy.

Outcomes-based funding (OBF) is a method of allocating state funding to higher education institutions based on measurable outcomes such as retention and credential completion. In fiscal year 2019–2020, 34 of 57 states or systems tied at least a portion of higher education funding to outcomes.^[1] The proportion of state funding tied to outcomes varies considerably, from less than 5 percent in Arkansas to 100 percent in North Dakota.^[2]

In recent years, several states, such as Texas and Louisiana, have implemented OBF models that incorporate updated OBF design principles. These include tying a large share of state funding to outcomes and including premiums (bonus funding) for credentials in high-demand fields and for achievements by students from populations that historically have had lower educational attainment.^[3] These models also introduce their own innovations: the Texas model, for example, is limited to credentials that have been shown to have a positive return on investment in the labor market. MDRC recently began a study of the new Texas community college funding formula that will examine how these updated OBF practices play out in the state and generate additional lessons for the field.

This brief summarizes major takeaways from studies of OBF models, with an emphasis on those using updated design principles, to the extent these have been addressed with research.

Outcomes-based funding (OBF) can focus institutions on student outcomes but, without other efforts, is unlikely to solve state credential attainment shortfalls.

Research suggests OBF models have had limited effects on credential attainment, particularly for longer-term credentials like associate’s and bachelor’s degrees.^[4] Some studies have shown the adoption of OBF is associated with increases in attainment of short-term credentials such as certificates, which can vary substantially in labor market value.^[5] OBF models, however, vary widely in the proportion of funding tied to outcomes, the outcomes rewarded, and whether they include premiums for certain fields of study or student populations. This makes it difficult to generalize about OBF as a uniform policy or speak to the effectiveness of new variations of the policy that deviate from what has been tried before.

When considering OBF’s limited effects, it is important to note that a common alternative to OBF—enrollment-based funding—operates on a similar principle, in that both methods in effect concentrate efforts on keeping students enrolled and progressing toward a credential. It stands to reason that shifting from enrollment-based funding to OBF might not significantly change financial incentives for institutions. It is also worth noting in the context of OBF’s limited effects that policymakers weigh both costs and benefits when deciding whether to adopt a policy, and the costs of implementing OBF tend to be low, particularly once the model is fully established and routine to administer.

OBF premiums can prevent unintended consequences and change targeted outcomes.

Research has shown states with premiums for bachelor’s degrees in STEM fields (science, technology, math, and engineering) saw increases in STEM degree attainment.^[6] Unlike early versions of OBF that resulted in reduced access for students from populations with low rates of educational attainment, versions with premiums for achievements by students from these populations were able to avoid this unintended consequence.^[7] Recent research has also revealed that a premium for adult student completions had a positive impact on bachelor’s degree attainment among adult students.^[8]

Therefore, evidence suggests that premiums are a useful tool policymakers can employ to align credential production with labor market needs and to maintain access for populations that are underrepresented in higher education. Policymakers should take steps to avoid shifting students away from fields with lower wages that are important for the state, such as education and social work. More research is needed, however, to better understand whether the effects of OBF premiums are consistent across different state contexts.

OBF may change the political dynamics of higher education state funding in some states.

Some higher education stakeholders have argued that, by increasing the perceived institutional accountability associated with state funding, OBF may be an effective strategy to encourage state policymakers to appropriate more funding for higher education, particularly in light of recent heightened scrutiny of the value of higher education.^[9] For example, the Texas state legislature explicitly tied a 23 percent increase in community college funding to its OBF allocation formula, and MDRC’s early research in the state suggests an increase of this magnitude would have been unlikely under the previous funding formula, which was largely based on enrollment.^[10] Recent empirical research provides some evidence that OBF adoption has increased state appropriations for community colleges but not universities.^[11]

States should plan to evaluate and refine OBF models over time.

Existing OBF research is retrospective and context-dependent, making it difficult to predict the impact of a new model in a different setting, or that of a model introducing novel innovations. Additionally, the OBF literature has notable limitations.^[12] Therefore, states adopting or revising an OBF model should plan to evaluate its effects within their specific context to refine the policy over time and contribute to the broader body of research on OBF.

Conclusion

OBF models have historically been insufficient on their own to significantly boost overall credential attainment. Thus, state policymakers who adopt OBF models may choose to combine the funding model with other tools, such as investments in evidence-based student support programs, to address state credential attainment shortfalls. OBF models have continued to proliferate across the United States and may be an effective strategy to make higher education state funding increases more politically palatable. Successful implementation of OBF hinges on thoughtfully designed approaches that align with state workforce needs and do not conflict with the access mission of higher education. Monitoring the effects of OBF in state-specific contexts and refining policies as needed is also crucial.

The Joyce Foundation provided support for this issue focus.