Aligning Student And Institution Incentives In Higher Education Finance

Nationally, the primary driver of revenue for colleges and institutions is the credit hour, a measure of short-term student enrollment. Credit hours produce revenue for institutions through primarily through the tuition transaction (student payment, with or without financial aid offsets) and in some cases by determining the amount of state funding received as well. This “cash-for-credit” model fosters institutions that can increase revenue through raising prices per credit, increasing student enrollment, or selling more credit hours per student. This financial structure does not, however, provide a sustainable and scalable revenue source for other things that public higher education needs to do—focus on low income students who cannot afford the full cost. This report examines the institution incentives in higher education finance and points out some recommendations.