Texas lawmakers are set to consider a new way of financing public universities that would reward schools for keeping students enrolled, moving them steadily toward graduation and producing degrees associated with positive economic returns. The proposal, highlighted this week as Texas higher-education officials and university leaders prepare for the next legislative session, would extend the state’s growing emphasis on outcomes-based funding from community colleges to four-year public universities.

The framework comes from a Texas Higher Education Coordinating Board study ordered through the state’s 2026-27 budget. The Legislature directed THECB to examine performance-based funding for general academic institutions, including student-success measures, overall formula funding, the needs of regional universities and the cost of maintaining stable appropriations. An executive committee representing Texas university systems and Texas Southern University worked with the agency on the recommendations.

The committee’s central recommendation is a rate-based system in which universities would receive specified amounts for producing defined student outcomes. Instead of comparing schools primarily against one another, the formula is designed so institutions can generate additional funding by improving their own results over time. THECB recommends using a three-year average of weighted student outcomes to reduce volatility.

Degree completion would be the largest component. Approximately 60% of the proposed performance-based funding would be associated with attainment, particularly what Texas calls a “credential of value.” For bachelor’s degrees, that concept uses a return-on-investment test examining whether the typical graduate earns enough within 10 years to recover educational costs and exceed the earnings of a typical high school graduate. THECB’s report says bachelor’s degrees currently awarded by Texas public universities clear that threshold.

The proposal would go beyond simply counting degrees. Bachelor’s credentials connected to high-demand occupations would receive a funding rate 25% above the base credential-of-value rate. Statewide high-demand fields would be determined from occupations expected to generate large numbers of new jobs, while regional labor-market needs would also be considered. Universities could have a mechanism to identify an additional field that is particularly important to employers in their region.

That regional component is important for campuses whose missions are closely connected to local economies. The committee included officials from systems and universities across Texas, including University of Texas at El Paso Provost John S. Wiebe. THECB’s report repeatedly stresses that a performance system must work for regional institutions rather than concentrating rewards only at large flagship campuses.

The other major piece of the model focuses on what happens before graduation. About 40% of performance funding would be associated with progression and persistence. Universities would earn funding when students cross 30-, 60- and 90-semester-credit-hour thresholds, giving institutions a financial reason to help students maintain momentum even when graduation remains several years away.

The 30-credit milestone would carry the highest rate because universities often devote substantial advising and student-support resources to the early stages of college. Rates for the 60- and 90-hour milestones would then decline by roughly 10% at each successive stage. Part-time students could still generate funding whenever they cross one of those thresholds, an important provision for universities serving large populations of working students and other nontraditional learners.

Persistence would operate differently. The metric would count students who remain enrolled at a Texas higher-education institution from one fall semester to the next. THECB’s committee argued that persistence deserves explicit recognition because some students need more time to accumulate credits but are nevertheless making meaningful progress toward a degree. To avoid giving universities an incentive to keep students enrolled indefinitely, however, the committee recommended limiting persistence funding to no more than 25% of the combined rates attached to the three credit-hour progression measures.

The formula also attempts to account for differences in the students universities serve. Proposed weights cover adult learners and students returning after extended enrollment gaps, academically disadvantaged students and economically disadvantaged students. For funding purposes, the report defines economically disadvantaged students through recent Pell Grant receipt, while the academic measure uses Texas Success Initiative readiness. The approach is intended to reward institutions for achieving outcomes with students who may require additional resources to persist and graduate.

Another incentive would target efficient completion. Bachelor’s degrees completed within 100% to 120% of the credit hours required by a degree plan could receive additional funding. The committee said reducing unnecessary credits can lower costs both for students and the state, although it acknowledged that universities cannot control every factor that creates excess hours, particularly when students transfer or change majors. The report therefore calls for further refinement of the underlying data.

Graduate education is included as well. The initial framework assumes master’s and doctoral degrees meet the credential-of-value standard while Texas develops more detailed graduate-level calculations. The committee recommends funding master’s degrees at 110% of the base bachelor’s credential-of-value rate and setting doctoral-degree support at least as high as the combined maximum performance funding associated with completing a bachelor’s pathway.

Importantly, THECB does not recommend replacing Texas’ existing university formulas with the performance system. The agency argues that current formulas account for factors the proposed model does not fully capture, including differences in instructional costs and fixed institutional expenses. A high-cost engineering or health program, for example, could require substantially more resources than a lower-cost program even when both produce credentials that meet the same outcome standard. Performance funding would therefore sit on top of the underlying formula structure.

One of the most difficult legislative questions involves Institutional Enhancement funding, which universities currently use for purposes including faculty salaries and student-support programs. THECB found large differences in how much institutions receive under that mechanism and warned that simply eliminating it and moving all the money into performance funding could produce significant losses for many campuses. The report offers possible transition mechanisms, including caps and minimum funding levels, rather than recommending an immediate wholesale conversion.

The proposal builds on Texas’ earlier restructuring of community-college finance. House Bill 8, adopted in 2023, shifted community colleges toward an outcomes-focused model that rewards credentials of value, transfers, dual-credit achievement and programs connected to workforce demand. The university proposal is not identical, but it reflects the same policy direction: tying a larger share of public investment to what students accomplish and what happens after they complete their education.

No final university performance formula is yet in state law. Legislators would still have to determine how much money to appropriate, set the rates attached to individual outcomes, decide how rapidly any new system should take effect and resolve the future of existing institutional funding. Those decisions will determine whether the framework becomes a modest incentive layered onto university budgets or a more consequential change in how Texas pays for public higher education.