How to Pay for Success in higher education

On April 26, First Lady Michelle Obama will host the third and final College Signing Day of the Obama administration. The event, held in New York City and hundreds of high schools across the country, celebrates everyday high school seniors in the same way that star athletes are recognized when they choose where to play football or basketball in college. Tens of thousands of hard-working, talented students will bask in the support and encouragement of the First Lady, her celebrity partners, and countless local leaders, ready to turn their college aspirations into reality.

The sad truth, however, is that a substantial share of these students who go on to college won’t actually earn their degree. Among students who are the first in their family to go to college—a population to whom the First Lady has devoted particular attention—three out of ten freshmen will drop out within three years of starting college. Students drop out for a whole host of reasons: difficulty paying for college, lack of academic preparation, and challenges navigating complex academic and financial processes to name a few.

We don’t lack evidence-based strategies to increase college success among low-income and first-generation students. Rigorous research shows that investments of various resource intensity, from need-based financial aid grants and college coaching programs to simple email campaigns reminding students to renew their financial aid, can meaningfully improve persistence and completion rates. Nonprofits like Bottom Line and College Forward that have traditionally operated intensive college advising programs in high school are increasingly shifting their models to provide ongoing support to low-income students while they are in college.

The challenge lies more in figuring out a way to pay to implement these strategies. Private philanthropies contribute substantially to college success programs, but are justifiably concerned about the sustainability of this funding strategy. Foundations, along with the federal government, have called on colleges and universities to invest more to improve outcomes for underrepresented student populations. Yet the substantial majority of low-income and first-generation college students attend public colleges and universities, where state appropriations for higher education have declined steadily and substantially over the past two decades.

Given the financial challenges that colleges and universities face, how can we create a sustainable model for funding much-needed college success interventions?

We believe a pragmatic solution lies in uniting two increasingly popular but distinct funding models: Pay for Success and performance-based funding. Pay for Success models attract private investment to social programs by guaranteeing a repayment on the investment by a public agency if the program achieves an agreed-upon level of improvement for the target population. Pay for Success strategies are currently being applied in a wide range of policy areas, including workforce development, early childhood education, and juvenile justice. Performance-based funding in education allocates a portion of state appropriations to public colleges and universities based on institutions’ performance on a variety of student outcome measures, such as the number of students who persist to their second year of college and degree attainment. The majority of states have some degree of performance-based funding in place for two- and/or four-year public institutions.

A Pay for Success framework implemented in states with performance-based funding would create strong incentives for colleges and universities to increase their investment in evidence-based strategies to improve college success along many dimensions. Pay for Success eliminates the upfront risk of a college paying for a program that may not yield meaningful improvements in persistence or degree completion. If the program doesn’t meet agreed-upon benchmarks, the private investor (e.g. a philanthropic foundation) absorbs the loss. By tying state appropriations to certain outcomes, performance-based funding creates strong incentives for colleges and universities to invest in programs that increase these measures.

“By tying state appropriations to certain outcomes, performance-based funding creates strong incentives for colleges and universities to invest in programs that increase these measures.”

This is particularly true in states like Tennessee, and Ohio, which pay a performance premium to colleges that improve outcomes for low-income and academically underprepared students. In these settings, evidence-based interventions that lead to sufficiently large improvements in student performance could generate enough additional state funding to offset the cost of paying back the private investor.

In this simple model, colleges would have little to lose by investing in innovative strategies to improve outcomes for low-income and first-generation students. Foundations could even sweeten the deal by only requiring a partial repayment of the initial grant, to allow colleges to realize a net positive return on the investment. Philanthropies can further minimize the risk of investing in college success programs by creating a marketplace for evidence-based strategies, only agreeing to fund organizations with a proven ability to improve outcomes for underrepresented youth. The goal of Pay for Success programs over time is that, once a program proves to be successful, colleges can sustain successful programs with revenue generated from performance-based funding, absent additional philanthropic funding.

Implementing a Pay for Success framework in states with performance-based funding offers several advantages over states with funding models based solely on enrollment levels. Performance-based funding can spur investment in interventions designed to increase outcomes along more dimensions of student success than outcomes tied directly to enrollment levels.  For instance, some performance-based funding models include incentives to increase successful remediation, transferring, and job placement, which are not captured by student enrollment.

One particularly promising student success strategy would be to invest in interventions to increase successful transfers from two-year to four-year colleges. This campaign could meaningfully increase degree completion and would generate additional revenue for the partnering two-year colleges under performance-based funding, but would not do so under an enrollment-based funding model. Targeting interventions in states with pre-existing performance-based funding policies would also reduce the burden on colleges to track and report student outcomes for Pay for Success funders. Colleges and universities could simply submit the same performance data to the state and philanthropic funder.

Of course, making an integrated Pay for Success-performance-based funding model work depends entirely on getting the details right. Foundations and colleges would need to collaborate to identify the performance thresholds necessary to make the investment at least cost-neutral to the institution. The structure of the performance-based funding systems would need to be thoroughly examined to estimate how much additional revenue institutions are likely to accrue by achieving these thresholds. We advocate to focus first on settings that provide performance premiums for improving outcomes for underrepresented populations. These are challenging, but not insurmountable, calculations, and could be undertaken in partnership with a growing cadre of researchers interested in both Pay for Success and performance-based funding models. Encouragingly, funders like the Michael & Susan Dell Foundation are currently pioneering these funding models in partnership with higher education institutions and college access organizations, which will generate valuable learning for future efforts.

The students who will be celebrating on College Signing Day have already achieved a great deal, and in many cases overcome substantial adversity to do so. We need creative, sustainable funding models to pay for evidence-based strategies to support these same students to revel with their college diplomas in hand four years from now.