Back to College Finance & Operations

History and Background: College Finance & Operations

Photo credit: Christian Horz/Adobe Stock

Back to College Finance & Operations

Little has changed regarding the financial underpinnings of American higher education in the nearly 400 years since Rev. John Harvard gave his library to what would become known — in commemoration of his generosity — as Harvard College. That private contribution supplemented funding from the Massachusetts Bay Colony, and while Harvard would eventually become independent of the government, most universities and colleges are still supported by a combination of tuition and private and public funding.

Early universities also relied very quickly on endowments, starting with the College of William & Mary, which was given 20,000 acres of farmland for this purpose from which it collected rents.

The biggest change over time has been in the proportion of support that comes from each of those sources, which you can find broken down here by the National Center for Education Statistics.

Funding Sources Shift

The first private colleges were largely underwritten by wealthy benefactors on behalf of religious organizations. But the divide between private and public higher education came into even sharper definition with the Morrill Land-Grant Colleges Act of 1862, which set up “land-grant colleges” in every state. Paid for by proceeds from the sale of federal lands, most would become today’s flagship public universities.

The federal government began to incrementally fund more of universities’ and colleges’ operations through tuition subsidy programs such as the G.I. Bill after World War II and other various grants and loans. The first federal loans were National Defense Student Loans, made available in 1958 and later renamed Perkins Loans. Guaranteed student loans began in 1965 and quickly started growing in the 1970s.

That’s because tuition at private colleges was rising faster than inflation. By the great recession that began in late 2008, public university tuition started going up, too, as states cut higher education funding. From 2000 to 2015, state funding on higher education fell by 31 percent, according to the Pew Research Center. By the time of the COVID-19 pandemic in 2020, it was $3.4 billion less than it had been in 2008; 37 states had cut per-student funding, six of them by more than 30 percent, and tuition at public four-year universities rose by 35 percent, the Center on Budget and Policy Priorities reports.

Follow the Money

Where does all this money go? Not necessarily where people think. Only around 30 percent, for instance, is spent on instruction — the main reasons institutions exist. The current-day breakdown of expenses is available here from the National Center for Education Statistics.

The biggest innovation in postsecondary funding wasn’t widely welcome by the higher education mainstays: the advent and speedy growth of private, for-profit colleges and universities. They depend almost entirely on federal loans secured by students who often don’t finish and end up with debt but no degree, or jobs at salaries too low to pay back what they’ve borrowed.

Just as with the debate about health care, there was less attention to how to reduce the price of higher education before the pandemic than on how to pay for its steadily escalating cost. Colleges and universities continued during the 2010s to hire, build and spend, even as enrollment fell. That began to change with COVID-19, when programs were cut and employees were laid off. The American Council on Education estimated that the crisis cost universities and colleges more than $120 billion in increased expenses and decreased enrollment; a more independent analysis by the Federal Reserve Bank of Philadelphia puts revenue losses, including declines in state and local budget allocations, at between $70 billion and $115 billion over five years.

Universities have doubled down on trying to raise more money from contributions. They’re seeking additional income from auxiliary services such as dorms and dining. They’re outsourcing more of what they do — which hasn’t always worked out as they’ve hoped — and a few are trying to come up with new sources of revenue.

While these efforts at least suggest a willingness to innovate, however, most don’t generate much cash. And except for the immense increase in cost, little else about the way that America pays for higher education has changed in 400 years.