Missouri Bill Would Fund Public Colleges Based On Graduates’ Earnings

The vast majority of college freshmen say they are pursuing higher education “to get a better job” and “to be able to make more money.” But too many degrees do not increase students’ earnings enough to justify the costs of college. A group of state lawmakers in Missouri want to change that by altering 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 link the funding of public universities and community colleges directly to their students’ earnings after enrollment. Schools which deliver higher average earnings for their students would receive more funding from the state. The plan aligns 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 largest weight would be the average annual earnings of students six to ten years after they first enrolled in the institution. All students who are currently employed and not pursuing a higher degree 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. Institutions’ scores rise if they enroll a higher share 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 preexisting earnings potential.

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

Once the Missouri government calculates performance scores for each university, it multiplies the scores by the number of students enrolled at each school. The product determines each institution’s annual appropriation from the state government. Schools with better outcomes, as measured by the performance score, receive more funding per student.

For example, the State Technical College of Missouri is a public community college that provides 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 rise between 10% and 23% by 2027 if the performance funding formula were adopted.

The college could use that new revenue to cut tuition and attract more students towards its high-paying vocational programs. Alternatively, it could use the funds to scale up high-value but expensive programs like nursing. Most importantly, though, the State Technical College of Missouri would be incentivized to continue offering programs that deliver high earnings for graduates—just as other institutions in Missouri’s system would be encouraged to expand programs that produce stellar economic outcomes.

Performance funding works, with the right targets

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

According to Third Way, most existing performance funding formulas rely on metrics such as graduation rates and credit hours earned. While these are important outcomes to measure, they are vulnerable to manipulation. There have been cases of schools churning out more short-term certificates or lowering academic standards to goose their completion numbers.

Labor market outcomes are used only occasionally in performance funding formulas, and even then, metrics like job placement rates or graduate licensure rates are the most common outcomes measured. Those are fine things to care about. But earnings concern students most, and earnings are also the metric that schools are least able to manipulate. Employers will not pay top dollar to hire students with degrees that lack labor market value.

One role model for the Missouri plan is Texas State Technical College, a community college in the Lone Star State that receives 100% of its state funding from a formula based on graduate earnings. The experiment has been a massive success. After the school moved to an earnings-based funding formula during the 2010s, the school closed 13 poorly-performing educational programs and reallocated resources towards degrees and certificates that were more in demand.

While closing the programs was a “tough decision,” according to chancellor Michael Reeser, “we decided that we would rather take a temporary reduction in enrollment than offer programs lacking a strong employment value for students.”

The results speak for themselves. Graduates of Texas State Technical College witnessed a 26% increase in their starting wages between 2009 and 2017, while the number of students placed in jobs rose by 65%. In recognition of these outcomes, the school enjoyed a 45% increase in state funding.

Unlike the Texas formula, the Missouri plan doesn’t rely totally on graduate earnings. Fifty-five percent of the performance score for universities and 70% of the score for community colleges is based on earnings, while the remainder is determined by the share of students receiving Pell Grants and other factors. Still, the Missouri plan is a massive step forward that will fundamentally change the incentives facing the state’s public colleges.

Areas for improvement

There are ways to improve the plan. For one, the share of students receiving Pell Grants is not the best proxy for low-income student enrollment. A large number of middle-class students receive the grant, meaning institutions can boost their Pell Shares without necessarily enrolling more low-income students. Moreover, if Congress increases the maximum Pell Grant (as it did this week), the number of higher-income Pell students would go up while the number of lower-income Pell students remains roughly the same. Missouri’s funding allocations would change even if schools did nothing to improve their earnings outcomes or enroll more low-income students.

Fortunately, there’s a solution: give students receiving larger Pell Grants more weight in the funding formula. Pell Grant awards are means-tested, so a lower-income student receives a larger grant 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 higher than a student receiving a $1,000 Pell Grant. This puts more weight on truly low-income students and limits the degree to which institutions can boost their performance scores by enrolling more students from non-low-income families.

The Pell issue, however, is a minor quibble. Overall, the Missouri plan is a strong proposal that would encourage colleges to improve their earnings outcomes and give more students a shot at middle-class careers. Hopefully it will be among the first of many proposals to tie more of colleges’ state and federal funding to whether they fulfill their most important mission: expanding economic opportunity for America’s students.