As parents drop their kids off at school and university students return to campus this fall, many are thinking about the future of the labor market and the value of a college degree to prepare for it. One in four Americans described their confidence in higher education as “very little” or “none” this year, with mixed opinions on whether college effectively equips graduates for the workforce.

These questions seem warranted. There is a growing gap in the relative unemployment rate of young workers, including recent college graduates, and early signs of AI’s impact on entry-level talent are showing in highly exposed areas like software development, financial analysis, and technical writing. In TIP’s conversations with businesses, team members increasingly hear that new talent lacks the foundational skills for workplace success, including communication, critical thinking, and the ability to ask effective questions.

Yet employers still broadly agree that a postsecondary degree or credential will be necessary for future work. And higher education is vital for addressing workforce challenges at scale—not just white-collar work, but the credentials required to meet a national 1.3 million-worker gap in the skilled trades.

Recognizing the imperative to hold institutions accountable and improve graduate outcomes, state and federal policymakers are increasingly using the power of the purse through outcomes-based funding. Unlike traditional approaches that focus on enrollments or instructional hours, these policies make education dollars contingent on student success in the labor market by including outcomes like credential completion, job placement in an in-demand industry, or wage growth in eligibility criteria or funding formulas. There has been renewed interest in two major levers: (1) state-level performance-based funding and (2) federal aid, including a recent expansion of the largest federal higher education aid program through Workforce Pell.

This growing shift toward a return-on-investment (ROI) approach pulls higher education even further into the workforce fold. The underlying principle is simple: what gets measured gets funded, and what gets funded gets built. As economic and workforce developers seek to build workforce pipelines in their own communities, they should remain aware of how the landscape is changing, the new tools and funding pathways available for their higher education partners, and what it means for their work moving forward.

Performance-Based Funding for Higher Education Training Programs

Performance-based funding (PBF) is a state-level approach that ties funding to specific student outcomes, including metrics like credential completion, retention, alignment with in-demand occupations, post-graduation wages, and credit transfers.

At the higher education level, there have been two distinct waves of PBF policy. Originating in 1979 in Tennessee and continuing until the 2000s, PBF 1.0 focused primarily on bonus funding if states hit certain measures. The second wave shifted to a base-funding approach. Under this framework, states could lose funding if they failed to meet target metrics. As of 2024, more than 30 states had adopted a PBF policy of some kind.

A third wave of PBF may be underway, defined by heightened accountability; focus on ROI; and emphasis on integrated pathways that link high schools, postsecondary institutions, and regional employers. Three recent examples of state action illustrate this latest shift toward workforce-driven funding.

• Texas (2023). Texas implemented a performance-based model for community colleges through HB 8, creating higher stakes for traditionally open-access institutions by tying base funding to students graduating with credentials of value (e.g., credentials that allow students to earn more than the cost of training), dual credit experience, or transfers into four-year universities.
• Colorado (2025). Colorado passed SB 25-315, which ties school district funding to every high schooler achieving one of the “Big Three” (16 concurrent/dual enrollment credits, an industry-based credential, or 60+ hours of meaningful work-based learning experience) by the time they graduate, with full implementation in 2029.
• Oklahoma (2026). In May, the Oklahoma State Regents of Higher Education approved adjustments to the funding formulas across community colleges, regional colleges and universities, and flagship universities to target greater opportunities for adult and underrepresented students; workforce outcomes, like STEM completions and median earnings; and retention and transfer rates, alongside enrollments.

In Texas, these policy changes have increased dual-credit enrollment, creating stronger links between K—12 and higher education, and prompted partnerships with employers to address regional talent needs due to skills shortages and job growth from manufacturing expansions. In fact, community college students’ outcomes outpaced expectations—and the state’s allocated budget—in 2026. This success has motivated the Texas Higher Education Coordinating Board to recommend a PBF model for four-year universities, with 60 percent tied to credentials of value and 40 percent tied to credit hour progression milestones.

While showing promise, PBF design involves careful trade-offs. Early models brought unintended consequences, as institutions expanded short-term credentials with low labor-market value or increased selectivity to protect performance metrics. Newer PBF iterations mitigate these risks by embedding equity metrics, offering extra funding weights for serving part-time, low-income, adult, rural, or HBCU students. As highlighted by research on designing state funding formulas to center equity, whether PBF is structured as bonus funding or base funding significantly alters institutional behavior.

Furthermore, targeting in-demand occupations is not enough. Even if a degree program aligns with an industry facing a local or regional shortage, the specific skills being taught must reflect modern employer needs, or students will not succeed in the labor market. This distinction makes talent alignment initiatives paramount.

Workforce Pell Grants

Beyond state budgets, Workforce Pell is another example of prioritizing student outcomes over participation. Implemented starting July 1, 2026, Workforce Pell expands the standard Pell grant program—the largest source of federal grant aid for US higher education—to cover short-term credentials between eight and 15 weeks. Designed for Title IV-eligible institutions, these grants allow even non-credit programs to participate if they align with in-demand, high-skill, or high-wage jobs (as defined by governors and state workforce entities) and stack toward long-term credentials or degrees.

The Workforce Pell grant is promising, and its potential impact is twofold: creating opportunities for low-income populations to quickly upskill and enter a higher-wage career pathway, while ensuring employers can leverage higher education institutions at the speed that’s needed. Though training programs cannot be employer-led and generally must be portable across businesses, the grant program’s flexibility creates opportunities for continued employer-education partnerships.

However, it has one of the highest thresholds for education program outcomes related to workforce indicators.

• Completion & placement. Programs must achieve a 70 percent completion rate and 70 percent job placement rate for federal aid reimbursement.
• Wage value standard. Total tuition and fees cannot exceed the graduate’s value-added earnings (defined as median earnings minus 150 percent of the federal poverty level, adjusted for regional cost of living; this requirement applies starting in 2030).

Meeting these accountability standards requires longitudinal data infrastructure that seamlessly links postsecondary completion records with state employment outcomes, like hiring and wages. Because many states lack these interconnected tracking systems, this has created hesitancy around uptake. However, workforce agencies in states like Indiana, Maryland, and Washington are launching pilot programs and leveraging existing Eligible Training Provider Lists (ETPL) to bridge data gaps and ensure smooth rollout.[i]

Strategic Considerations for Economic and Workforce Developers

For economic and workforce development organizations, the shift toward outcomes-based funding opens new opportunities to shape regional talent pipelines.

• Create win-win partnerships. Employer engagement is paramount to higher education alignment. By supporting industry sector partnerships and other mechanisms to align training with the in-demand skills of local industry, economic and workforce developers can create stronger, more affordable career pathways for students and jobseekers, provide support and stability to local education institutions, and create a more high-quality, accessible talent pipeline for employers.
• Promote awareness of broader career pathways. Economic and workforce developers can enact awareness campaigns to ensure not only young students, but also parents and adult learners, know about the expanding financial aid available for a range of career pathways. While recognizing that a four-year college degree is still the most valuable education, incentivizing nondegree credentials helps to promote greater access and meet talent shortages at lower cost. However, these programs will not make a difference if learners don’t know they exist.   
• Support quality instruction. Graduate outcomes depend not just on aligned curriculum, but also on high-quality instructors who can effectively deliver that curriculum. Workforce developers should consider strategies like facilitating externships and promoting recruitment of retiring industry professionals to support the next generation of workforce.
• Achieve state-level alignment. States determine the in-demand industry list and other requirements, even if legislation comes from the federal level. It is important that practitioners check their state’s higher education board guidelines to understand which industries and credentials are aligned.
• Engage in policy feedback. Effective public policy relies on thoughtful design and continuous improvement. For example, performance-based funding programs with a strict definition of “credentials of value” can disincentivize training for essential, but undervalued, occupations, like childcare workers. States like Texas have expanded what “credential of value” means to include community benefits, not just wage-based ROI. Practitioners can make a real impact to improve the system by sharing their feedback and experience with state and federal legislators.

By incentivizing measurable labor-market outcomes over enrollment numbers, education funding policy is moving closer to a systems-level shift that will ultimately ensure greater opportunities for students and a more aligned talent pipeline for employers.

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[i] This section is informed by “Workforce Pell Implementation: What the Workforce System Needs to Know,” a webinar hosted by the Employment and Training Administration at the U.S. Department of Labor via WorkforceGPS on June 30, 2026.

ETPLs are public lists of training providers determined by state workforce entities to be eligible to receive funding from the Workforce Innovation and Opportunity Act (WIOA). Find your state’s ETPL here.