American education is notorious for its expensiveness, which leads to significant political debates. A common viewpoint is that the federal government should take a more active role in financing and regulating colleges and universities. However, it is not clear whether enhanced federal financing will lead to cheaper education. Understanding how higher education in the US is financed is essential in ascertaining the nuances of sources of revenues generated by colleges and universities.
Reasons and Examples
What is the role of the federal government in funding post-secondary education?
It is important to understand the structure of post-secondary education in the US. Colleges, universities, and other educational institutions can be public and private. The difference between them is the source of funding – private colleges and universities survive on endowments, while public institutions receive financial support from states and the federal government (Two decades of change, 2019). The overall provision of finances for education is regulated by the Higher Education Act (Gándara & Jones, 2020). The specific forms of federal financial support are grants for students and research projects (Two decades of change, 2019). As a result, the government’s role is to help American citizens receive education and ensure scientific progress.
How do federal and local funding sources affect tuition costs?
Tuition costs are dependent upon a number of factors, the most important of which is the size of funding. Tuition fees are important because they also provide universities and colleges with the financial resources necessary for their functioning (Bahrs & Siedler, 2019). The most common assumption is that the less funding a specific institution receives, the more it is pressed to increase tuition costs. However, this is not the case in reality, as there are numerous examples of educational institutions simultaneously receiving federal funding and increasing tuition costs. The academic years of 2007-2008 and 2008-2009 serve as an example of this phenomenon, which became known as Bennet’s hypothesis (de Rugy, 2019). A possible explanation is that a university that receives federal support also gains prestige, which makes studying in it more expensive.
Local funding is considerably less influential in comparison to federal financial support. The funds received from local sources are primarily spent on operational expenses of local colleges and universities (Two decades of change, 2019). Unlike federal funding, local funding is constant and essential for the survival of educational institutions in the current economic conditions. Therefore, there is no prestige bonus, which would justify the increase in tuition costs. Colleges and universities depend on local communities to provide them with applicants who are able to pay the tuition fee. As a result, the increase in local funding leads to a decrease in tuition costs.
Identify the revenue that colleges typically receive from federal sources
Each year is different in terms of the amount of financial assistance given to educational institutions. However, the average volume of federal funding generally stays the same. It should also be mentioned that there are three types of public institutions, all of which receive governmental financing – public, private nonprofit, and private for-profit. Public colleges typically receive around 6 000 dollars, private nonprofit ones receive 8 800 dollars, and the revenues of private for-profit institutions range from 360 to 1 390 dollars (Postsecondary institution revenues, 2022, para. 10). As a result, aside from private for-profit colleges, federal spending on other types of institutions are not volatile.
How do revenue sources differ between private universities and colleges and those within the state university system (ie, public state institutions)?
The major difference between the revenues of private and public institutions is the proportion of federal participation. Public colleges and universities are owned and supported by states directly. Meanwhile, private institutions offer educational services with the specific purpose of making a profit. As a result, all corresponding economics of private colleges and universities revolve around one source of revenue – tuition fees. On average, tuition fees account for more than 90% of revenue generated by private institutions (Postsecondary institution revenues, 2022, para. 8). This does not imply that private colleges and universities do not have other sources, but their role in generating revenue is extremely limited compared to tuition fees. Public institutions have a more diversified financial portfolio than their private counterparts do. Although tuition fees are also important for public institutions, their contribution to revenues does not exceed 20% (Postsecondary institution revenues, 2022, para. 8). These colleges and universities also rely on other sources, such as federal funding and investments.
Altogether, it should be evident that financing of higher education in the US is dual-natured. Different forms of delivering educational services determine various types of educational institutions. The purpose of private colleges and universities is to generate revenue, which manifests in the importance of tuition fees for their survival. These institutions have more flexibility in decision-making, which comes at the expense of extremely small governmental support.
At the same time, public institutions answer to states and the government, which decide how much support each entity receives. Therefore, each public college and university has to make every effort to ensure sufficient federal funding. However, paradoxically, the acquisition of federal finances does not necessarily lead to a decrease in tuition costs. Institutions that are financed by the government are considered more prestigious, leading to high tuition costs. Subsequently, American students are left with two equally expensive alternatives, neither of which is likely to cost less in the future.
Bahrs, M., & Siedler, T. (2019). University tuition fees and high school students’ educational intentions. Fiscal Studies, 40(2), 117-147.
de Rugy, V. (2019). Reevaluating the effects of federal financing in higher education. Mercatus Center. Web.
Gándara, D., & Jones, S. (2020). Who deserves benefits in higher education? A policy discourse analysis of a process surrounding reauthorization of the Higher Education Act. The Review of Higher Education, 44(1), 121-157. Web.
Postsecondary institution revenues. (2022). Web.