An Examination of the (Un)Intended Consequences of Performance Funding in Higher Education

Historically, many colleges have received state funding based on how many full-time equivalent students are enrolled at the beginning of the semester. This model provides incentives for colleges to enroll students and thus provide access to postsecondary education, but this model does not necessarily provide incentives for institutions to help students successfully complete degree programs. Many states are reconsidering the enrollment-based funding model and instead are aligning funding models with state goals and priorities.

Previous studies have shown that state performance funding policies do not increase baccalaureate degree production, but higher education scholarship lacks a rigorous, quantitative analysis of the unintended consequences of performance funding. 

This article uses difference-in-differences estimation with fixed effects to evaluate performance funding in Indiana. 

The researchers find that performance funding did not increase the number of graduates and instead led to declining admission rates and increased selectivity at Indiana’s public universities. When compared with surrounding states, they find limited evidence that the effects of performance funding could disproportionately limit college access for Indiana’s low-income and minority applicants.