The Harrowing Inequities of Performance-Based Funding in Higher Education

Performance-Based Funding (PBF) is used by over 30 U.S. states to tie college funding to student outcomes like graduation rates and retention. While supporters argue it encourages productivity, critics point out that it can exacerbate inequities between wealthier and under-resourced institutions. Understanding PBF is crucial for students navigating college selection, scholarships, and career pathways—areas where tools like NextStep can provide guidance.

How PBF Works and Its Intentions

PBF links state funding to measurable outcomes, theoretically rewarding colleges for high performance. Advocates say it ensures accountability and incentivizes efficiency. However, research indicates real-world gains are inconsistent, and outcomes often depend more on institutional resources than performance itself (Ortagus et al., 2025).

Unequal Distribution of Resources

High-resource colleges often benefit under PBF, while smaller and minority-serving institutions can lose funding (Hagood, 2017; Chan et al., 2020). This creates “winners and losers,” reinforcing inequities across socioeconomic and racial lines.

Equity Challenges

Even with equity provisions, PBF may worsen racial and socioeconomic gaps. Minority-serving institutions in Tennessee and Ohio lost disproportionate funding, and racial gaps in degree completion widened under PBF (Chan et al., 2020). Policies focused on efficiency frequently overlook equity goals, highlighting systemic challenges that affect students’ opportunities.

Design and Implementation Matters

The success or failure of PBF largely depends on policy design. Some states embed performance incentives in base funding, others offer bonuses. Colleges may also “game” the system, reducing intended benefits (Hagood, 2017; Dougherty & Natow, 2019). Students can benefit from understanding these dynamics, helping them choose institutions strategically.

Why This Matters for Students

Policies like PBF influence which institutions thrive and which struggle. For students seeking internships, scholarships, or college placement, awareness of these funding inequities can guide decision-making. Platforms like NextStep help students navigate educational opportunities and plan paths that maximize resources and outcomes.

Conclusion

Performance-Based Funding aims to improve efficiency but can unintentionally widen disparities. For students, understanding these policies provides an edge in selecting colleges and planning their academic and career journeys. By leveraging platforms like NextStep, students can make informed decisions to overcome systemic inequities and succeed.