States sit at the center of the higher education finance system—and the stakes are rising. With federal uncertainty, shifting policy priorities, and budget pressures intensifying, state leaders are under increasing pressure to show that public dollars for postsecondary education advance both broad attainment goals and specific workforce needs. At the same time, the push for “credentials of value” is accelerating, reinforced by outcomes-focused funding debates and accountability pressures tied to graduates’ earnings.

Much of the policy conversation about postsecondary-workforce alignment has focused on appropriations: how should state dollars be distributed across institutions, and can performance-based funding models incentivize credential production in priority fields? But state agencies also control a second major lever: student financial aid. Unlike appropriations, financial aid—and especially targeted aid—can influence students’ enrollment and program choices at the outset, making it a potentially powerful tool for boosting completion in fields that connect to high-opportunity occupations.

This broader lens is increasingly important as states expand and refine programs that steer students into programs that offer credentials of value. States differ widely in how much they spend on financial aid, how that aid compares to their overall higher education spending, and the extent to which both direct support and aid are targeted to specific industries or occupations. To achieve their policy and workforce goals, states must optimize these investments and consider targeted financial aid alongside direct institutional support, rather than treating them as separate or competing priorities.

To support states’ decisions about aligning funding to goals, with support from the Strada Education Foundation, we developed a set of resources that bring these pieces together: a framework paper, a case study report, and an Excel-based tool that shows how much states spend on targeted aid, which fields those programs prioritize, and how those choices line up with states’ unique workforce needs.

What we produced

Together, these three resources are meant to help state higher education agencies that are considering changes to their state financial aid portfolios or funding formulas to understand their investment opportunities and trade-offs.

The three resources are:

  • A report that presents a framework for classifying state postsecondary investments across two core levers—direct institutional support (appropriations) and student financial aid—and distinguishes targeted from non-targeted approaches. We also report on the extent to which states across the country are leveraging these targeted sources in meeting their workforce needs.
  • A case study report that examines five states (Washington, Virginia, New York, Kentucky, and Ohio) to show how labor market conditions, credential production patterns, and investment portfolios interact and where alignment strategies succeed or fall short.
  • A new Excel tool that allows users to identify which financial aid programs are “targeted” in each state and explore high-opportunity occupations by state, with filters for wages, openings, projected growth, and typical education requirements.

What we learned

Most states are allocating little targeted funding to boost workforce alignment.

While many states invest heavily in higher education, relatively little of that funding—through either appropriations or financial aid—is targeted to increase the production of high-value credentials. Where states do use performance-based funding models tied to credentials of value, it’s typically a small share of total funding. The existing evidence on the effectiveness of performance-based funding is mixed, though, which raises questions about whether it will actually strengthen postsecondary-workforce alignment. Financial aid, by contrast, is an underused lever that can directly shape whether students enroll, which programs they choose, and whether they persist—especially for low-income students—making it a powerful complement to appropriations.

The design and governance of targeted financial aid programs matter.

Targeted financial aid works best when program design and governance keep the policy signal clear. Our research suggests these financial aid programs are most effective when they support credentials with strong, explicit linkages to specific occupations and industries and when those fields are closely tied to key workforce shortages. Done well, targeted aid can steer students toward priority pathways and accelerate progress toward workforce and attainment goals. But when aid is targeted to a broad set of “in-demand” credentials, the signal can weaken, impact of the investment becomes harder to measure, and it’s less clear whether aid is increasing credential production where workforce needs are greatest. In fact, we found many instances in which states have appropriated funds for a targeted aid program, yet student uptake and therefore program expenditures remain low. Broad lists can still be useful when states need regional flexibility or want to balance economic and social priorities, but they require monitoring and adaptation when circumstances change. Because labor markets shift faster than most policy infrastructure, states also need governance that can update eligibility criteria and priority lists regularly so programs stay aligned over time.

We need more evidence and insight into what works.

The effectiveness of state financing strategies is shaped by a complicated set of interacting factors—enrollment trends, program capacity in high-demand fields, and how targeted aid stacks with existing aid programs—all while state and regional labor markets constantly shift and evolve. That complexity makes it hard to judge the cost-effectiveness of targeted aid in improving student and workforce outcomes, especially relative to other state-level investments, like performance-based funding. There is some evidence, however, to support financial aid as a lever for improving outcomes: an additional $1,000 per student in annual aid is associated with an approximately two percentage point increase in degree completion.[1] In our analysis, we saw that some states devote only a small share of their aid portfolios to targeted programs yet still produce enough graduates in in-demand fields, while others invest more heavily and continue to face shortages. Targeted aid’s impact is highly context-dependent, and the field needs clearer evidence on which designs work best, in which conditions, and why.

Where we go from here

Direct institutional support should remain the protected foundation of state higher education finance because it is indispensable for affordability, institutional capacity, and completion. But, our analysis also shows the limits of relying on performance-based funding alone to drive “credentials of value”: the share of appropriations targeted to these credentials via performance-based funding is often small, and the evidence is mixed on whether this funding accomplishes its intended goals. That’s why states should elevate targeted financial aid as a high-potential demand-side lever: aid can influence students at the point of entry—what they enroll in and whether they persist—so it can complement institutional funding in ways appropriations typically can’t. Even without increasing total spending, states may be able to reallocate existing aid toward priority programs aligned with labor market needs while still honoring fields with strong social value that may not rank highest on wages. Ultimately, the goal isn’t to choose between aid and appropriations—it’s to build a coherent investment portfolio that sustains institutions, supports students, and channels both toward pathways that deliver lasting economic and social value.

 

[1] Tuan D. Nguyen, Jenna W. Kramer, and Brent J. Evans, “The Effects of Grant Aid on Student Persistence and Degree Attainment: A Systematic Review and Meta-Analysis of the Causal Evidence,” Review of Educational Research 89, no. 6 (2019), https://doi.org/10.3102/0034654319877156.