Trends in Postsecondary Education - Higher Education: Where Does The Money Come From?

Percentage distribution of general education revenues at public universities per full-time-equivalent student, by revenue source: 1996

Federal, state, and local government appropriations (taxes) pay the bulk of public higher education. Despite increasing enrollment, government appropriations for public universities have been steadily declining for decades, falling from 63% of revenue in 1980-81 to 40.7% in 1996 (state/local and federal appropriations). During that same period, tuition and fees increased as a share of all revenue from 13% to nearly 25%.

Private institutions (pie on the left) derive a bigger share of their revenue from tuition and fees (45.4% compared to 24.6%), and a much smaller share from government appropriations (1.1% compared to 41.6%). Only about 5% of students attend the most select private colleges, but their high sticker prices command a lot of media attention. One explanation for why private schools can charge such high prices was offered by the Philadelphia Inquirer: "An attitude, prevalent among the wealthy — which holds that a school charging less than its competitors must not be as good."

When a school's financial circumstances change — as when revenue from grants, contracts, and gifts goes down or the costs go up — tuition increases are the result. Schools are trying to limit tuition increases by broadening their range of revenue sources. Acquiring research dollars from businesses is one way to do this. For example, Carnegie Mellon University and Stanford University get about 40% of their revenue from sponsored research. This path has led to accusations that research institutions are captives of the businesses whose research helps to support them.

In this same vein, concerns have been voiced about the increasing number of institutions that have turned to commercial ventures to help pay off their debts. For example, some colleges now allow corporate sponsors to support their athletic departments in return for displaying company names, logos, and signs. This trend "creates an additional income gap between large and small colleges, reinforces the entertainment culture that now pervades college sports, and leaves schools dependent on a highly volatile source of income," complains the Philadelphia Inquirer.

10 Largest Private Gifts to Higher Education Institutions Since 1967

As shown on the charts and in the table, private institutions are much more dependent than public institutions on gifts and donations. All but one of the institutions listed (University of Colorado) are private. Private gifts and endowments accounted for 23% of 1996 revenue for the private sector, compared to only 9% for public universities. The Chronicle of Higher Education recently reported that philanthropic organizations are shifting their focus away from higher education because of a perception that colleges aren't "needy." This doesn't bode well for keeping tuition costs down.

In the 1990s, with the stock market at record highs, a growing number of colleges began investing their endowments, hoping that the higher yields would hold down soaring tuition costs. Then came the downturn. By January 2002 the average rate of return on college endowment investments dropped to minus 3% in the first year of declines since 1984. The bigger the endowment, the harder the fall. Then, of course, came the talk of big tuition hikes.

Source: Chart: National Center for Education Statistics. The Condition of Education 1999, Table 39-1. Table: "Largest Private Gifts to Higher Education Since 1967." Chronicle of Higher Education Almanac. Online. Available: http://chronicle.com/stats/big_gifts.htm. March 13, 2002. Gaul, Gilbert M., and Frank Fitzpatrick. "The Price of Winning: The Business of College Sports — What Was…." Philadelphia Inquirer. 14 September 2001, p. A1. Hartigan, Rachel, and Ben Wildavsky. "A School's Free-Lunch Program." U.S. News & World Report, 12 February 2001, p. 50. Zhao, Zilu. "As Endowments Slip at Colleges, Big Tuition Increases Fill the Void." New York Times. 22 February 2002, p1A. Pulley, John L. "For Investment Managers, Boom Years Are Over." Chronicle of Higher Education. 25 January 2002. Online. Available: http://chronicle.com. March 13, 2002. Marklein, Mary Beth. "College Endowments Follow Steep Downward Curve." USA Today, 14 January 2002, p. 5D. "Crumbling Support." Chronicle of Higher Education. Online. Available: http://chronicle.com. March 25, 2002.