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Getting a Better Return on Education

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Getting a Better Return on Education

The right incentives can encourage colleges to help low-income students succeed. August 3, 2021
Education

President Joe Biden recently canceled some student loans and proposed free community college. In doing so, he unwittingly acknowledged an inconvenient truth about public higher education in America: many institutions promise upward mobility but leave students saddled with high debt and low earnings.

The problem is real. Almost one out of every ten students who attend a public college or university default on student loans within two years of graduation. Until the federal government addresses the underlying problems, it’s up to states to get higher education back on track.

We already know one way that works: basing a portion of colleges’ public funding on their students’ post-enrollment earnings. State governments spend about $86 billion on higher education every year—the third-largest category of state general-fund spending. State leaders thus have powerful leverage over colleges. In most states, the majority of this money flows to colleges with no accountability.

Earnings-based funding, by contrast, connects the amount of state subsidy that colleges receive to the earnings of their former students. The rationale is simple: schools with high-earning alumni provide a good return on investment for both students and taxpayers. If enough of a school’s funding is linked to student earnings, administrators will have no choice but to direct professors, advisors, and career-development staff to use their local knowledge to improve students’ career outcomes. Schools may start emphasizing job skills and connections to local businesses or professional networks; some irrelevant or insubstantial majors will likely drop away as schools specialize. Most importantly, schools will become likelier paths to upward mobility for every student—a crucial outcome for publicly funded institutions.

Depending on the school they attend, graduates holding the same degree can see vastly different career outcomes. For example, two years after graduation, the median earnings of a graduate with an associate’s degree in electrical and power-transmission installers from Texas State Technical College (TSTC) is $81,333 a year. Yet the median earnings for a graduate with the same degree from Los Angeles Trade Technical College (LATTC) is $41,937 a year. This gap isn’t due to different student demographics: TSTC has a 25 percent higher proportion of students receiving federal Pell Grants for low-income students than LATTC.

Completely earnings-based funding models work best for technical and career education, where students’ objectives are clearer than at a four-year university. But since increased earnings potential is one of the main reasons students enroll in college, state subsidies should be partially based on earnings even at universities with many disciplines. Strong liberal arts programs shouldn’t be adversely affected, especially with long-term earnings data that catches students coming out of graduate school. Even without a graduate degree, however, philosophy degree-holders have the highest salary growth of any major in the first ten years of work, beating out median salaries for chemistry, biology, information technology, and business majors.

A well-designed earnings-based funding program can prevent gaming, unlike current programs that reward schools for academic outcomes like number of degrees awarded. The formula should use the earnings of all students who enroll (not just graduates) to increase retention and ensure that schools don’t neglect struggling students. It should tie a significant portion of state funding to performance and focus on as few outcomes as possible to see significant results. Earnings-based funding should also give additional funding for Pell-eligible students to prevent cherry-picking wealthier ones and reward the schools that give low-income students the best boost in earnings.

While low-income students may require more resources to succeed, colleges with many of these students don’t necessarily produce graduates with lower average earnings. According to College Scorecard, 40 percent of the University of Houston’s 2014–2015 student body was Pell eligible. At the University of Northern Iowa, only 24 percent of students were Pell eligible. But average annual earnings of students ten years after enrollment at Houston were $57,200, while at Northern Iowa they were only $45,900. And the earnings gap was even greater for students from poorer families: $57,700 for Pell-eligible families at Houston (even higher than the university’s average), and $41,900 at Northern Iowa (much lower than the university’s average). Nor does the gap appear to be related to state funding: Northern Iowa received $3,000 more per student in state appropriations than Houston did in fiscal year 2015.

Many states are beginning to incorporate earnings into their funding formulas, but for its full concentration on earnings, the Texas State Technical College model stands out from the crowd. Since 2014, TSTC’s Returned-Value Formula bases 100 percent of the system’s funding on the value added to the state economy by TSTC graduates’ earnings. The results have been remarkable: graduates have seen a 117 percent increase in earnings since then. The system has closed 13 underperforming programs and built a strong network with local businesses. Far exceeding the national average of 34 percent, 60 percent of TSTC’s student body receives federal Pell Grants.

Today, many public schools have an incentive to enroll more students and burden them with as much debt as possible. With earnings-based funding, schools with poor outcomes would be motivated to adopt best practices from successful schools, and high-performing schools would gain additional funds with which to finance new facilities and hire new faculty.

Earnings-based funding means that schools—not just students—have money on the line. With the correct incentives, colleges and universities will put the public funds that they receive to the best use and finally start providing a good return on investment for both students and the public.

Photo by ROBYN BECK/AFP via Getty Images

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