A new study produced by the Community College Research Center looked at the results of performance-based funding, whereby public institutions receive money based on student achievement, in American colleges. It reached at least one conclusion reformers might want to keep in mind moving forward.

According to the report:

Performance funding produces intermediate institutional changes in the form of greater use of data in institutional planning and policymaking and in changes in academic and student service policies and practices that promise to improve student outcomes. However, claims that performance funding does indeed increase ultimate outcomes—in the form of improved rates of retention, completion of developmental education, and graduation—are not validated by solid data.

Performance funding levels leads to grade inflation and the weakening of academic standards. There is also some evidence that colleges are begin pushed by accountability demands for higher retention and graduation rates to pressure faculty to avoid giving failing grades.

None of these findings should really be terribly surprising (performance-based funding requires data to make decisions; obviously such polices lead to “greater use of data”) but note that last point.

Funding based on performance leads to grade inflation. If an institution gets funding based on performance measures it also controls, we should not be surprised when it reports higher performance.

Many critics of performance-based financing for higher education have brought up the potential for precisely this problem.

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Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer