The Uncertain Future of Private Research Universities

The United States has developed an extraordinary system of research universities. Of the more than 2,600 four-year colleges and universities, I am referring to those most research-intensive institutions, a subset of the Carnegie R1s, where research and scholarship led by faculty, in collaboration with doctoral students and post-doctoral associates, produce knowledge and inventions that advance society. Uniquely in America, our research universities are a mix of state-supported and private, not-for-profit institutions. My concern is whether the research emphasis of many private universities will be financially sustainable going forward.

Although most of today’s private research universities were founded in the 1800s, the modern version came to exist after World War II when the government committed to supporting research and graduate education. A cornerstone of America’s research enterprise is the open market system that allocates federal research funding to faculty investigators as a result of peer review of their proposals, letting the quality of the ideas and faculty accomplishment determine who wins the funding, no matter their institution. By 2022, the academic research enterprise totaled almost $100 billion supported by government, foundations and the universities themselves, with 57 universities— including 19 private universities—spending more than half a billion dollars annually on research. The government-university research compact has lasted three quarters of a century and has led to research universities that are the envy of the world.

So why now do we see darkening clouds for private research universities? The problem is the growing component of research now funded by the universities themselves. From the beginning, the university research enterprise has been a shared endeavor with both universities and government contributing to the funding. But the balance between these contributions has begun shifting in recent years. Data from the National Science Foundation Higher Education Research and Development (HERD) Survey from 2010 to 2022 shows that federal support as a percentage of the total research expenditures has dropped 6 percent (from 61 to 55 percent), with university contributions rising to 25 percent of the total, up from 2 percent 12 years ago. The question is whether most private universities can continue to absorb these increases. This issue is most applicable to institutions where research is a sizable fraction of their expenditures, at least 10 percent, but the breakpoint depends on their relative dependence on tuition and endowment revenue.

What drives the university contribution? Contrary to what most faculty believe, there is not a pot of gold attached to research support. The motivation to be a leading research university is simply to have as large as possible impact on society, to attract the most talented faculty and students, and to be considered the best. The result is an intense competition for federal and not-for-profit research dollars that do not pay the full cost of the research they are supposed to support. Universities contribute by paying the salaries of faculty performing research during the academic year (not included in the 25 percent institutional contribution in the HERD survey)—except in medical schools where the National Institutes of Health still supports these salaries—and by funding the part of the so-called indirect costs (IDC) of research not paid by sponsors. The HERD number also includes the myriad other forms of university research support such as the purchase and maintenance of state-of-the-art scientific equipment, start-up packages for new researchers who need to generate research results in order to win external grants, cost sharing on external grants, and stipends for doctoral students, especially early in their research careers and in fields that don’t attract external funds.

To see the challenge created by the cost shifting, consider a model university (ModelU) with $1 billion of annual revenues today, mostly coming from student tuition (50 percent) and auxiliaries (15 percent), but with 20 percent from external research funding, 10 percent from endowment income, and 5 percent from annual gifts (not including gifts supporting research). Assuming that the endowment distributes 4 percent annually to university operations, amounting to 10 percent of total revenues, or $100 million, the endowment corpus would be $2.5 billion, which looks like a hefty number supporting a $1 billion annual operation.

Now, if ModelU’s contribution to research is 25 percent of external funding (which equates to only 20 percent of total research spending, less than the 25 percent average from the HERD data), that means 5 percent of the institution’s total revenues are used to cover research expenses. But where does the $50 million come from? Assuming auxiliary revenues balance expenses, the research support can only come from either tuition, endowment, or gifts. The reality is that much of the funding from the last two categories is designated by donors, some funding research, but tuition revenue must also contribute. The shortfall would be even larger for a university with a larger percentage of research revenue and the same size endowment.

The existential challenge develops if the growth in university contribution continues over time, with inflation driving larger increases than are supported by external sponsors. Total university research expenditures have increased at about 4 percent annually for the last decade, while federal research funding increased only by about 3 percent, with institutional support absorbing most of the difference, increasing at 6 percent annually. If this gap continues for another decade, ModelU’s annual contribution rises to more than $100 million—an additional $50 million—growing university support to account for 27 percent of total research spending compared to 20 percent today.

Where will ModelU find another $50 million for research funding? Unless there is substantial endowment growth through new gifts, tuition generated either by increased rates or by taking more students will have to fill the gap. At Model U, funding $50 million entirely from tuition revenue would require annual growth of almost a percentage point above the Higher Education Price Index (HEPI), which is already typically higher than the Consumer Price Index (CPI). I know there are skeptics who think of an endowment in the billions as a bottomless well and a large enough endowment may be a funding mechanism, but it must be considerably larger than ModelU’s. Although there are a handful of private universities with very large endowments, a simple estimate puts endowment income on average at less than 10 percent of the annual operating budget, just like at ModelU. (This estimate assumes that the endowment distribution to the budget is 4 percent of the market value and compares this distribution to total university expenses.)

There is tension between the research and educational missions of the university, as it strives to enhance the quality of education—not swell the class size—and to increase social mobility through need-based aid, while holding down costs for the middle class and coping with inflation. These goals are at odds with excessively subsidizing research. However, the quality of the university is built upon faculty who are excellent teachers and leading researchers, so backing down from the commitment to research will change the character of the university.

To continue to excel in research will likely require private universities to make hard choices, focusing their resources on fields where they want to compete with the very best. The only consolation will be that other private universities will be making these choices too, with fewer attempting to have the same research breadth that was conceivable during the last half century.

What will happen if private universities don’t shift their strategies from letting “a thousand flowers bloom”? Perhaps the federal government will forestall the problem by increasing research budgets. I am skeptical, given the political divide and the pressures on the national budget. Some universities will successfully increase fundraising enough to meet their growing research needs, but most will not, and their ability to compete for funding and research talent will decline if the cost shifting increases. Over the last five years, a list of notable universities had externally generated research expenditures grow far below the rate of inflation.

Hopefully, university leaders and the government will work together to rebalance the cost shifting. If not, there may be fewer research-intensive universities, creating fewer opportunities for talented faculty and graduate students. This would be a tremendous loss for America that we will feel in the decades ahead.