Three Ways States Can Lead on Higher Education Reform

Key Points

States have the opportunity to lead on higher education reform. This issue brief outlines three policy areas for consideration:

• Outcomes-based funding: States should overhaul appropriations to public colleges and universities to reward outcomes important to students, such as earnings after graduation.
• State authorization reform: To spur competition in the higher education market, states should streamline their approval processes for new colleges and universities.
• State-imposed degree requirements: When a college degree is not strictly necessary to do the work, states should not require one as a condition of employment, either for government jobs or for state-licensed private-sector jobs.

Introduction

In recent decades, the federal government has assumed a larger role in the finance and regulation of higher education, traditionally a state responsibility. But in a time of divided government and gridlocked national politics, the prospects of meaningful higher education reform at the federal level look ever dimmer.

Instead of waiting for federal action, states should take the lead on solving higher education’s myriad problems. In addition to higher education’s declining value for students, high prices and the sluggish pace of innovation at most colleges mean fewer students realize value from postsecondary education. Unnecessary degree requirements for middle-class jobs exclude millions of otherwise qualified workers who only hold a high-school diploma.

In this issue brief, we offer three policy areas in which states should focus their reform efforts. First, states should rethink the way they fund public colleges and universities to reward the outcomes most important to students, such as job placement, earnings, or preparation for graduate education. When rewarding degree completion, states must think about the value of the degree as well, whether it be academic or in the labor market. Such “outcomes-based funding” will encourage schools to prioritize creating value for students and society rather than just collecting tuition dollars.

Second, states should overhaul the processes they use to approve new schools to operate. The higher education market is characterized by a lack of competition — few nonprofit schools have opened over the past three decades, which keeps prices up and innovation down. State authorizing agencies should streamline the process of starting a new college, allowing entrepreneurs to pursue more efficient and effective ways of educating students.

Finally, states should review the degree requirements they impose on their workforce and drop any that are unnecessary. More states should join the trend of removing degree requirements from jobs in the state executive branch. In addition, states should remove degree requirements from occupational licenses, especially if those licenses already require workers to certify their skills in other ways. Doing so will allow more of the 141 million Americans without a four-year degree to fully participate in the workforce.

This issue brief initiates a series of FREOPP research reports that will explore avenues for higher education reform at the state level in greater detail. The sections below contain overviews of the three policy areas that should form the core of state-level higher education reform efforts: outcomes-based funding, state authorization reform, and the dismantling of state-imposed degree requirements.

Outcomes-based funding

Higher education institutions currently have financial incentives to increase enrollment, increase tuition, and minimize costs, without regard for the educational, financial, or occupational consequences for students. But states can fix this by changing the way they fund public colleges and universities. States can use outcomes-based funding (OBF) to reward institutions that serve their students well. Designed properly, OBF can alleviate some of the largest problems for students today, including low completion rates, poor return on investment, burdensome student debt, and overly rigid education pathways.

States have traditionally based public higher education funding on enrollment, contact hours, and historical operating costs. However, over the past four decades, most states have developed OBF models to allocate some state higher education funding based on student achievement. As shown by the diagram below, OBF is a small percentage of total state higher education funding in most states.

Certain OBF models have successfully improved student outcomes. For example, the wages of Texas State Technical College (TSTC) alumni have increased by 42 percent over the past decade with an OBF formula based on that singular metric. Their “Returned-Value’’ formula calculates the difference between former students’ wages and the minimum wage, then returns a portion of that added economic value to TSTC as state funding for instruction and administration. OBF at TSTC also caused a cultural shift within the institution. As TSTC Chancellor Michael Reeser described, “Programs have concluded that their future is determined by factors within their control. This empowerment has led to better faculty and staff engagement.”

Other states have seen positive results from OBF as well. Studies in Indiana, Ohio, and Tennessee show increases in remedial education; better course articulation and transfer processes between institutions; increased online education; better student services like academic advising, tutoring, career services, and first-year programming; streamlining of degree requirements; and adding more short-term credentials.

To fight low graduation rates, most states place a strong emphasis on degree completion. But due to this OBF metric in Indiana, Ohio, and Tennessee, faculty reported receiving pressure to inflate grades, pass students they wouldn’t normally pass, steer students toward “easier” courses, and remove difficult courses from curricula just to increase degree completion rates. Institutions in Ohio and Pennsylvania reported “pressure to improve the academic profile of its entering class” by raising minimum GPA and test score admissions requirements and turning need-based scholarships into merit-based scholarships. In addition, two-year institutions were penalized for students who took select courses without intending to complete a certificate or degree program.

Most college students don’t just want a degree, they want a valuable degree (whether that value be financial or academic in nature). Instead of a narrow focus on completion, OBF should emphasize the value that institutions provide for students and more closely reflect unique institutional missions. For example, career and technical institutions should focus on metrics of alumni success in the workforce, such as job placement and wages. To encourage completion, states can measure the job placement and/or wage outcomes of all students who enroll in the institution or a program (i.e., of all the enrollees in a nursing program, how many end up employed in nursing four years later.)

Public research universities, on the other hand, may wish to couple degree completion with metrics like academic skill attainment, research production from faculty and graduate students, or the number of undergraduates who continue on to graduate programs. Liberal arts colleges may wish to implement a similar funding model, but include metrics like artistic output, student satisfaction, continuing education rates, or other measures. Some institutions may even desire different metrics for specific programs, such as bar exam pass rates for law schools or job placement in teaching or administration for education training programs.

The State University System of Florida provides one example of OBF metrics tailored to each institution within a system. The Board of Trustees for each institution selects the institution’s tenth OBF metric. For Florida State University, it’s the number of bachelor’s graduates who passed an entrepreneurship class. For the New College of Florida, it’s the percent of graduates who complete more than three “High-Impact Practices,” which include capstone projects or theses, internships, study abroad, writing-intensive courses, living-learning communities, undergraduate research, first-year experience, learning communities, service learning, and collaborative projects.

Finally, to preserve educational opportunities for high-need postsecondary students, OBF should consider institutions’ admissions policies and student demographics. Open enrollment institutions and institutions serving low-income or less academicallyprepared students collect fewer tuition dollars, yet students at these institutions typically require more resources to succeed at the postsecondary level than their peers at highlyselective institutions.

Thus, OBF for institutions with high-need student populations should be accompanied by funding for initiatives like remedial education, tutoring, mentorship, additional academic and career advising, and internship and/or apprenticeship funding. Institutions with high-need student populations may struggle to improve student outcomes without monetary support for these additional programs, as has been documented in Indiana, Ohio, and Tennessee. If an institution serves student populations with above-average needs, OBF should incorporate metrics specific to those students’ achievements (i.e., a metric for the in-field job placement rates of low-income students alongside the same metric for all students).

Well-designed OBF can create financial incentives that align with the mission of public higher education — providing intellectual and economic opportunity. Success metrics informed by student and institutional goals can improve the return on investment, skill attainment, and overall academic experience for postsecondary students.

State authorization reform

Even as the number of students pursuing higher education has grown, the number of degree-granting public and private nonprofit colleges has not kept pace. In fall 1990, roughly 13.6 million students enrolled in 3,216 institutions. By 2020, the number of students had climbed to 18 million — an increase of more than a third. But the number of degree-granting nonprofit colleges had ticked up only slightly, to 3,227.

In a well-functioning market, supply responds to demand. As the number of students rises, entrepreneurs should set up new schools to serve them. While the number of for-profit institutions did increase over the past three decades, the ranks of nonprofit schools — which generally serve America’s traditional college students — barely budged. This suggests that new nonprofit schools are subject to significant barriers to entry.

When such barriers are present, new institutions cannot enter the market to offer students a lower price or a better quality education. Current market conditions are consistent with significant barriers to entry. Despite a recent modest decline, college tuition has risen substantially. Educational quality has also stagnated: the college earnings premium, once on a consistent upward trend, is now starting to fall.

To begin operating a new institution, entrepreneurs must first seek approval from the relevant state agency, known as a state authorizer. New colleges must have state authorization even if they do not intend to use federal student aid. This usually makes the state government the first point of entry to the market for new institutions.

However, the requirements that state governments impose on new schools can be substantial, and are often not directly related to the quality of education on offer. The requirements are also built around traditional models of higher education and may conflict with the plans of innovative but potentially effective new colleges.

Research from the American Enterprise Institute catalogs some of the requirements imposed by various states. For instance, Mississippi requires a minimum square footage for classrooms. North Carolina requires institutions to submit campus floor plans, which must include a library with a “pleasant and inviting atmosphere.” New York requires new colleges to submit their classes’ syllabi, which must satisfy a long list of specifications.

Many state authorizers do not specify exact requirements, but instead leave criteria vague. South Carolina, for instance, requires a “reasonable” student-teacher ratio, but does not define “reasonable.” New institutions may be at a loss when considering how to satisfy these requirements, and the vagueness may give capricious state bureaucrats excuses to reject applications.

Most states require institutions seeking authorization to gain recognition from an accrediting agency. South Dakota, for instance, requires new institutions seeking authorization to have accreditation or affiliate with an accredited university. This can lead to a chicken-and-egg problem: the regional accreditor overseeing South Dakota schools, the Higher Learning Commission (HLC), requires applicants for accreditation to submit evidence of state authorization. While many accreditors and authorizers have workarounds allowing institutions with provisional accreditation to work toward authorization and vice versa, accreditation requirements are still a significant barrier to setting up a new institution. Accreditation is a cumbersome process which can take years and cost institutions tens of thousands of dollars.

The state authorization process can move at a glacial pace. Authorizing agencies are usually an afterthought for state governments. A survey by state authorization expert Molly Hall-Martin finds that some agencies have just one full-time staff member devoted to authorization activities, and the median authorizer’s budget represents just 0.04 percent of total state support for higher education. As a result of such understaffing, the authorization process can drag on for months, if not years. Some states limit the number of programs that can be approved in any one year.

Many institutions complain that they receive little help from governments in navigating the state authorization process. “There’s a general sentiment for some institutions that they just don’t know what the process is,” reported one anonymous state official in a series of interviews by researchers Angela Boatman and Katrina Borowiec. A representative from an institution wishes authorizers “were staffed more to be able to be as responsive and move as quickly as the businesses clearly want to move.”

State authorization reform is a relatively new policy area, but there are promising avenues for change. The AEI research suggests “moving away from an input-based, compliance-driven approach” which presents unnecessary burdens on institutions and strains the limited capacities of authorizing agencies. Instead, institutions seeking authorization should be required to present only “basic documentation of their plans” to demonstrate seriousness and financial viability, and agree to adopt appropriate consumer protections. Once an institution has been active for a few years, states should consider its performance record when making reauthorization decisions.

It should be relatively easy to start a new college, even if that college doesn’t conform to traditional notions of what a university should look like. State authorizers should focus on consumer protection and assessment of student outcomes rather than try to prescribe institutions’ organizational or pedagogical models. Such a reconceived role for authorizers will make the market for higher education more competitive and yield lower prices and better educational quality for students.

State-imposed degree requirements

Degree inflation afflicts virtually every sector of the American labor market. From managers to nurses to secretaries, a greater proportion of today’s job openings require college degrees than did in the past. In 1980, just 30 percent of workers earning between $60,000 and $80,000 in today’s dollars had four-year college degrees. By 2021, the share had risen to 52 percent, and the increase is accelerating.

This phenomenon risks closing-off job opportunities to Americans without college degrees, even if they are qualified to do the work. Degree requirements deprive competent workers without bachelor’s degrees of promotion opportunities and raises. College graduates suffer too, because degree inflation leads many to work in jobs below their skill levels. Recent college graduates who work in jobs that have not traditionally required degrees face a wage penalty of over $10,000.

Unfortunately, state governments are among the biggest culprits behind degree inflation. States are far more likely than private firms to demand college degrees from job applicants, even for jobs paying similar salaries. In the private sector, 28 percent of workers earning between $40,000 and $60,000 have a bachelor’s degree or higher. Among workers earning the same salary but employed by state governments, the proportion is 63 percent.

Some governors are stepping up to tackle the problem. Several states have announced that they will no longer require degrees for most jobs in the state executive branch. This is a welcome development. Maryland, among the first states to enact such a policy, has seen a 34 percent increase in job applications from individuals with relevant skills and experience but no college degree. Other states have coupled the move with additional supports: Colorado introduced an apprenticeship program to prepare workers without degrees for roles in government.

More states should follow the lead of Maryland and Colorado. But degree requirements in the state executive branch are only the tip of the iceberg. State policy also drives degree inflation through the occupational licensing system.

Occupational licensing is traditionally intended to ensure that licensed workers provide services with a minimum level of quality. But this goal must be weighed against the downsides of occupational licensing.

Most obviously, licensing is a barrier to entry that closes off job opportunities to workers who cannot obtain the license, especially if the license requires a college degree the worker does not have. Licensing also chokes-off the supply of skilled workers. One study found that minimum education requirements for child care workers reduce the number of available child care centers. Another analysis found that licensing makes it harder for homeowners to secure the services of skilled tradespeople.

Wherever possible, states should drop licensing requirements. For instance, 27 states license home interior designers, and eight of those require a bachelor’s degree as a condition of licensure. But in the other 23 states, home interior designers are not licensed at all. It makes little sense that interior designers must have a bachelor’s degree to work in Virginia, but need no degree just across the border in North Carolina.

We do not argue that all occupations should be de-licensed, but policymakers can eliminate certain requirements of licensure that are irrelevant or superfluous. In particular, state governments should drop college degree requirements from licenses wherever possible, particularly if the license already requires workers to demonstrate their skills in other ways.

For example, New York recently passed a law requiring registered nurses to earn a bachelor’s degree–even though, as a condition of licensure, nurses must already complete at least a two-year program of study, accrue clinical hours, and pass a standardized exam. The bachelor’s degree requirement on top of the others may be superfluous, and could lead to nursing shortages at a time of rising demand for healthcare. (Notably, North Dakota repealed a similar requirement in 2003 due to a shortage of nurses.)

State governments can fight degree inflation on multiple fronts. First, they should drop unnecessary degree requirements for government jobs, as many states have already done. Second, they should abolish licensure for occupations where it is not necessary to protect public health and safety. Third, where licensing is still necessary, states should endeavor to reduce degree requirements and rely instead on direct assessments of workers’ skills and capacities. These reforms will give more Americans the opportunity to secure good middle-class jobs, and strengthen the economy by allowing labor to flow to where it is most needed.

Conclusion

Public confidence in higher education is slipping and, in the near term, the federal government seems unlikely to do anything about it. Fortunately, states have the opportunity to lead on higher education reform. Outcomes-based funding, state authorization reform, and the removal of unnecessary state-imposed degree requirements can produce a more dynamic higher education system and a fairer labor market.