How to Give Colleges Better Incentives to Get Better

Like so many of us living in Wonk’s World, I’ve been checking out the seemingly endless (but fascinating!) series of edu innovation conferences to which Jeff referred in his last post. The other day at an AEI confab I was struck by two things. First, the normally clean-cut Michael Horn, executive director of the education arm of the Innosight Institute, has grown a pretty awesome seventies ‘stache, a facial asset that he cultivated as a participant in the “Movember” fundraising initiative for prostate and testicular cancer. Second, having grabbed the audience’s attention, Horn set forth an intriguing idea for injecting greater regulatory flexibility into how the federal government determines the access of new and existing colleges to federal student-aid dollars.

Horn’s plan isn’t brand-new – he’s been writing about it for a couple of years. But it should have particular resonance for federal policymakers who are looking to make significant policy breakthroughs in the next few years. In a nutshell, Horn – who coauthored Disrupting Class: How Disruptive Innovation Will Change the World Learns with Clay Christensen – wants to move away from what he terms the “all or nothing” regime for federal Title IV eligibility, in which colleges either clear the funding-access bar or don’t. This creates a perverse incentive, he says, because the policy goal of widening college access means that Title IV standards can’t be too high without large numbers of students and institutions being excluded. What’s more, current federal financial aid regulations discourage innovation because they give students no incentives to make quality-cost tradeoffs. As Horn and several co-authors wrote last year in a Center for American Progress report, “It is no easier for students to get loans to colleges that offer a stellar return on investment than it is to get them for colleges that offer a poor one.”

Horn’s solution? A Quality-Value Index that creates a sliding scale for federal financial aid eligibility, both for traditional institutions and for the for-profit colleges that are currently subject to the much-debated “gainful employment” rules. It would be based on some version of four core measures: job placement rates, perhaps three or six months after graduation; post-graduation salary over time, divided by the total cost per degree; student satisfaction – would they choose to repeat their experience? – as measured by a survey; and an institution’s cohort default rate, adjusted for students’ credit risk. With these elements in place, a university in the top 25 percent of the QV ranking could receive 100 percent of its revenue from Title IV. An institution in the bottom 25 percent could receive only half its revenue from Title IV, with those in the middle eligible for varying degrees of support. Students would have an easier time receiving financing at schools that are top performers, so the QV Index would give them far greater incentives than they have today to seek out institutions where they can get more bang for the buck.

I have no illusions that Horn’s plan, a radical departure from the status quo, would be an easy sell. And naturally it would require a significant amount of fleshing-out. But a model along these lines has much to commend. On the one hand, it gives the government a significant and appropriate gatekeeper role. At the same time, it offers a flexible regulatory approach that opens up the higher ed market to new providers who can prove their effectiveness while pushing existing colleges and universities to do much better. If policymakers really want to tackle the shortcomings of today’s postsecondary system, a careful focus on incentives – and close consideration of plans like the QV Index – would be a good place to start.

Photo Credit: Valore Books