International Higher Education, Spring 2000

Financing Higher Education in the United States: An Overview

The most significant distinction in revenue sources for the 3,600 nonprofit institutions of higher education in the United States is between public institutions governed by one of the 50 states and private institutions governed by private boards of trustees.

Sources of Revenue
Tuition payments account for only 19 percent of the revenue for public institutions, but they make up 42 percent of the revenue--the largest single source--for private institutions. Tuition is a smaller but still significant part of the revenue for public institutions. In contrast to many nations, all public and private institutions of higher education in the United States charge tuition.

State government is the source of 36 percent of the revenue for public institutions but only 2 percent of that for private institutions. Revenue from state government is the largest single source of revenue for public institutions, which receive block grants for core functions such as their instructional program. The small portion of their revenue (2 percent) that private institutions receive from state government is usually in the form of grants or contracts awarded competitively for a specific purpose, such as a special research or training project. The states generally do not supply any general operating funds for private institutions.

Local government is a minor source of funding for both public (4 percent) and private (1 percent) institutions. However, the revenue to public institutions from local governments usually consists of operating funds for local public institutions, typically two-year community colleges. The revenue to private institutions from local governments is again in the form of competitive grants or contracts for specific purposes.

The federal government provides a significant share of the revenue for both public (11 percent) and private (14 percent) institutions. For both types of institution, these federal revenues come in the form of competitive grants or contracts.

Private sources provide 4 percent of the revenue for public institutions but more than twice as much (10 percent) for private institutions. The major private sources are individuals (frequently the alumni of an institution), business, and philanthropic foundations.

Endowment income is the source of 5 percent of the revenue for private institutions but just 1 percent of the revenue for public institutions. Typically, donations from private sources (individuals, business, and foundations) to the endowment trust are invested, and the annual income is used by the institution for operating expenses or other purposes. In effect, endowment income is another form of revenue from private sources. Combining the revenue from private sources with that from endowment income, private institutions receive a significant 15 percent of their revenue from these sources. Even public institutions get 5 percent of their revenue from such sources.

Sales and services provide an identical 22 share of the revenue for both public and private institutions. The main portion of revenue in this category comes from students who pay rent for dormitory rooms or eat in the institution’s dining halls or cafeterias.

Finally, to complete this sketch of the sources of revenue of institutions of higher education, we must consider the financial aid provided to students through federal government programs, which totaled $46 billion in the 1998-1999 school year. Students spent much of this $46 billion on tuition, dormitory, and dining hall charges at institutions of higher education. In other words, some of the revenues in the categories "tuition" and "sales and services" in fact belongs in the category "federal government." Since federal student aid funds are frequently mingled with other student funds, it is not possible to measure exactly how much of federal financial aid becomes revenue at institutions of higher education. In the final analysis, the "federal government" share of the revenues for both public and private institutions would be on the order of 20 to 25 percent.

Clearly, all institutions, both public and private are heavily dependent on their ability to obtain funds from a variety of sources. Institutions must work to attract tuition-paying and financial-aid-receiving students. Their dormitories and dining halls must compete with the private sector for student-consumer spending. They must vie with other institutions as well as private-sector vendors for grants and contracts from the federal, state, and local governments. They must outdo other worthy causes for the favor of individual, business and foundation donors. Even the state and local support public institutions receive for general operating expenses is subject to competition. The allocation of these funds is usually driven by institutional enrollments. Public institutions must always struggle for more favorable state revenue allocations. The most successful institutions in this effort are the more flexible, dynamic and high-quality ones.

Who Pays?
Two groups pay for higher education: first, society as a whole (i.e., all taxpayers), which provides support for higher education institutions through public or government programs, and second, the private or nongovernmental sector. Private contributions to higher education can be further divided between those that come from households (i.e., students and their families) and those that come from other private sources such as individual donors, business, and foundations.

Because the benefits of higher education are both public and private, contributions from the two sectors are called on to pay for higher education in the United States and other nations. There is a very large range in the shares that different countries assign to the public and private sectors. For example, in Korea 84 percent of the total expenditures for higher education come from private payments and only 6 percent from the public sector. In contrast, in Denmark .5 percent of the total expenditures for higher education come from the private sector and 99.5 percent from the public sector. In the United States, 52 percent of the total expenditures for higher education come from private payments, which includes 38 percent from households and 14 percent from other private contributors. This level of private payments and household payments is exceeded only by Korea and Japan among OECD (Organisation for Economic Cooperation and Development) industrial or developed countries. The average among OECD countries is 20 percent of total expenditures for higher education from private payments, of which 16 percent is from households. Conversely, among OECD countries the average share of higher education expenditures from public support is 80 percent.

Among the OECD countries, the United States relies much more heavily on payments from households and other private contributors and less on public support. It is also noteworthy, however, that the total expenditures for higher education in the United States as a percentage of gross domestic product is twice the OECD average--2.4 percent in the United States versus an average of 1.2 percent for the OECD countries.

There may be a lesson here. Perhaps a system that balances support for higher education more evenly among the public, households, and other sources in the private sector results in a much higher absolute level of support for higher education. Such an arrangement enables the United States to maintain a more "democratic" higher education sector than other countries, one that encompasses a larger share of the population. For example, 67 percent of those who complete secondary school enroll in higher education in the United States, a rate much higher than in most other nations.