What are colleges’ real incentives?

When it comes to influencing student behavior, incentive-based models tend to perform well. Research suggests that financial incentives can, for example, help drive enrollment. Designed carefully, in the form of “time-bundled contracts,” there’s new evidence they may even be able to help reduce high-risk behavior among college students otherwise undeterred by Covid-19 restrictions. These time-bundled contracts would reward students who forgo high-risk behavior in the near term with money later.

Yet when it comes to influencing the behavior of colleges—which, of course, wield no small influence on the academic performance and behaviors of students—it’s unclear what the most meaningful incentives may be. Let alone the ways to manipulate those incentives, so that colleges can better serve students.

Even looking at finances alone, it’s hard to pin down exactly which areas to target. For private colleges, no two institutions’ mix of endowments, donations, and tuition cash flows look exactly the same. For public schools that rely on state funding, standards vary dramatically from state to state. Variety in higher education is, overall, a good thing. But it does add complexity when we try identifying incentives that could help improve all types of colleges all over. 

In a 2014 Washington Post article titled “Half of states incentivize colleges to graduate more students,” reporter Reid Wilson describes a few examples of the funding incentive structures implemented in different states:

Most states measure the number of bachelor’s degrees awarded or the six-year graduation rate. Arkansas, Hawaii, Illinois, Kansas, Maine, Minnesota, Mississippi, Nevada, Ohio, Pennsylvania, South Dakota, Texas and Virginia award additional points for higher numbers of graduates in science, technology, engineering and math fields.

In Florida, four-year universities are judged in part by the success of their graduates. In fiscal year 2014, the state allocated $20 million in performance funding based in part on the median average full-time wages of undergraduates employed in the state one year after graduation.

Other states award money based on school improvement. Louisiana two- and four-year institutions are measured in part based on how their retention rates change: More students staying in school leads to more funding. Louisiana lawmakers apply at least 15 percent of base appropriations, one of the highest percentages of performance-based funding among any state, to school allocations.

In theory, all colleges are motivated by some combination of altruism or mission, dollars, and prestige. The more that dollars and prestige overlap with altruism or mission, as happens with the above states’ performance-based incentive structures, the better for everyone. 

To that end, a recent article in The Atlantic highlighted University of Georgia professor Janet Frick’s proposal of a new kind of rankings system. (I wrote about rankings systems here.) She suggests that ranking colleges by their ethical commitments—rather than on wealth and selectivity, as happens with U.S. News & World Report—may help curb the spread of Covid-19 presently and also encourage equity on college campuses long-term.

“If public safety and community wellness won’t move leaders, [Frick] reasoned, maybe rankings will,” Ian Bogost writes. Bogost points out some of the most common criticisms of well-ranked colleges and universities—such as promotion of economic inequality among students and among tenured versus adjunct faculty, and the disproportionate racial and ethnic make-up of their student bodies in comparison to that of the U.S. population. “But,” he writes later, “if colleges must be scored, then let us judge them based on the justice they produce, not just the wealth they accrue.”

Such a rankings system could certainly help align the incentives of colleges with the well-being of students. If colleges could be motivated to climb a list like that Frick proposes, the incentive alignment could create powerful change. For the many tuition-dependent private colleges that may not be vying for the top spots in U.S. News & World Report rankings, or that are simply unable to deprioritize tuition cash flows in order to elevate rankings, though, there’d remain a void where incentive alignment should be.

At least for those colleges, it’s a social imperative that the money schools collect from students is proportional to students’ financial outcomes. School-based income share agreements (ISAs) can help hold schools accountable for their students’ career outcomes. They can also help schools track student outcomes and assess their academic programs more holistically. Crucially, school-based ISAs can provide institutions with a meaningful, positive incentive to improve students’ post-college success. 

Colleges focus their resources on the efforts that deliver results in terms of dollars, prestige, and mission. I’ve said before that they should be measured, in part, against their individual missions. But when financial incentives fail to take students’ future earnings into account, a key to improving student outcomes falls out of the equation.

What are your thoughts on aligning incentives between colleges and students? How can positive incentives be built into higher education, so that students have better chances of professional success?