The Higher-Ed Cost Crisis As Research Cost Crisis

Why is college so unaffordable? Here’s one reason: Universities are funding sponsored scientific research with billions of dollars of institutional funds derived in part from undergraduate tuition payments.

by Reed Fawell III

On January 23, Jim Bacon raised the question, “Does Undergraduate Education Subsidize University R&D?” In the post he concluded:

Here’s the problem: We can’t hope to strike the proper balance if we don’t know who is subsidizing whom. Higher-ed accounting is a specialized discipline and opaque to outsiders. We are fumbling in the dark. We need more information. The higher-ed establishment has no interest in providing that information, which can only lead to unwelcome calls for change. Only the General Assembly can make Virginia colleges and universities cough up the data. But, sadly, most legislators don’t know what they don’t know, and none of the bills submitted to the General Assembly this year (that I’m aware of) are calling for more cost and accounting transparency.

Actually, the system is not as opaque as Jim imagines. In this post, based primarily on National Science Foundation data, I contend that tuition paid by undergraduate students subsidizes their universities’ research and development, the overwhelming bulk of which is in the fields of science and engineering. Further, I argue that undergraduate tuition often subsidizes the research sponsors, including the federal government, private businesses, and/or non-profit organizations such as health care organizations. Without undergraduate student tuition payments, many such research programs at public universities would not be financially viable.

Unsponsored research paid for by U.S. universities and undertaken by their faculties has increased 49.1% in the last four years, now amounting to a staggering $17. 975 billion. I suspect that even more unreimbursed research, particularly in the humanities, is likely off these charts, unrecorded as time and money spent under the accounting rubric of “instruction.”

Source: National Science Foundation

While internally funded university research in the humanities exploded in the 1970s and continues unabated, the dollar cost of this research was relatively small, and remains so, compared to cost of hard-science research, particularly the fields of engineering, life sciences, and natural sciences. Public research universities are absorbing not only direct costs incurred by their own staff and faculty for independent research done on their own account but unreimbursed indirect costs of sponsored research relating to marketing, proposal writing, regulatory compliance, resolution of conflict-of-interest issues, lab construction, and compensation of heavily recruited faculty. These expenses, which often enrich faculty, are far too frequently paid for with funds generated by undergraduate tuition, and drain resources that could be used to better educate undergraduate students.

Why are unreimbursed costs increasing so rapidly? The reasons are many.

States bear some responsibility. Legislatures have cut state support that covered some of these research costs.

But that’s hardly the full explanation. Driven by a desire to increase their national and international rankings, research universities have entered new fields in the hope of winning more sponsored research. As competition for a limited pool of research dollars has intensified, universities must spend more money and effort submitting proposals. Where once there might have been only one bidder, there might be five or six today. Universities often now conduct preliminary or collateral research at their own expense in the hope of qualifying for future work. Often, institutions share contracts with researchers at other institutions, spreading the costs and increasing the odds of winning. But sharing research contracts also reduces revenues. (It’s likely that these sharing arrangements are imposed by sponsors to avoid stovepipe issues, forcing researchers within various universities to share their knowledge rather than horde it for their own private advantage, thus decreasing costs for sponsors at the expense of universities.)

In sum, research universities find themselves in a buyer’s market for hard-science research that increasingly favors sponsors and funders. Not only can funders pick and choose among more bidders, they can cherry pick the tasks, off load the difficult, risky and costly work, and retain the best of research jobs for themselves.

In reply, many public research universities spend more of their own funds in an effort to compete, or give the appearance of competing, and keeping busy. Public universities typically have two main revenue sources to subsidize research: state appropriations and undergraduate tuition. In the past, state appropriations exceeded tuition. Now tuition revenues exceed state aid by substantial and growing margins. In other words, undergraduate tuition increases have covered the growing gap between dwindling state appropriations and growing unreimbursed research costs.

How long will the public tolerate chronic rising tuition when higher charges go not to students’ education but to administrators, research professors, and research sponsors?

Educators have tried a variety of solutions — mostly failed — to keep the machinery running. They have increased the number of undergraduate students admitted. They have appealed to wealthy undergraduate applicants by dangling deluxe student accommodations, food and entertainment. They have discounted tuition for some students, ramped up tuition for others, and recruited high-paying foreign students. They have peddled packages of loosely underwritten loans. They have catered to students with inflated grades, deflated study requirements,”junk courses,” safe spaces and a toleration of hookup cultures.

Today’s higher-ed system is unsustainable.  The public research university business model is broken and hemorrhaging losses. Tuitions are through the roof, even as average American households have lost wealth and suffered stagnant wages. Student debt, over $1.5 trillion to date, is plagued with rapidly rising student loan defaults. In the last two or three years, there are signs that demand for higher ed is shrinking. More students, parents, and taxpayers wonder if a college education is worth the cost. The public rightfully wonders if fixes to the spiraling costs serve only to turbo-charge higher-ed’s spendthrift ways.

Absent radically different solutions, universities’ R&D obsession will exacerbate the problems outlined above. Today, federal research contracts cost universities on average 25% more money than the government is willing to pay for the work.

For example, Arizona State University, a seemingly thriving public research university ranked #55 nationally, generated $405 million on research in FY 2013. The federal government covered only $201 million, forcing the university to self-fund $150 million in losses, or 37% of its total research costs. By 2015, Arizona State’s self-funded research losses totaled $205 million on $518 million gross research expenses.

In 2014, the University of Michigan at Ann Arbor, America’s #2 research institution in total research expenditures, spent $445 million of its own monies to support its $1.4 billion in total research costs. This 32% loss was up from 28% in 2011, despite a minor increase in gross revenues. And in 2016, Michigan’s self-funded losses were just under $504 million on $1.431 billion in gross research expenses.

The University of California system, the largest public research system in the world, garnered $3.5 billion in externally sponsored research grants (including $720 million worth of reimbursed indirect costs) several years ago, but had to spend $1.5 billion in indirect costs to set up, compete and win the work. Thus the California system lost 20.6 cents on each dollar spent on the cost of the research (that is direct and indirect research costs). Today, based on those averages, those losses would be around 25 cents per dollar of cost.

While losses on public university research have trended sharply upward for most universities, a few dominant players have kept their losses to a minimum. Johns Hopkins, the #1 research institution in the country, used only $88.3 million of its own funds to support gross expenses of $2.17 billion — only 4%. In the fiscal year 2016, Hopkins was out of pocket $96.5 million in unreimbursed costs on a total of $2.43 billion in research expenses.

The University of Washington in Seattle, #3 nationally in gross research costs, spent 6.5% of its own funds, up from 5% two years earlier. In 2016, the university was out of pocket $105.6 million on $1.227 billion in research expenses. The University of Chicago, another high performer, lost only $40.7 million on $420 million in research expenses during fiscal year 2016.

How did these players do so well? Perhaps their proximity to so many savvy, long-time private research corporations and venture funds played a role. Perhaps they had nurtured strong, deep, long-term relations with sponsors and partners. Perhaps they built cutting-edge infrastructure that they could keep busy constantly while tapping deep financial resources. Or perhaps they were lucky. Wild swings in losses among equally experienced players suggest that bidding for federal research is inherently risky.

During the last recession, America’s system of federally funded research threatened to come apart, particularly at the public university level. The 2009 American Recovery and Reinvestment Act (Obama’s massive stimulus bill) funded $100 billion in additional Pell Grants, along with a one-time $20 billion infusion of public monies into higher education’s academic health and science research to cover rising gaps in state funding programs. Soon thereafter the federal government accelerated its student loan guarantee program. Then, in 2012, the Obama administration announced plans to double its federal funding for STEM research. This stimulated university spending on research in anticipation of a flood of new “research business.” But the administration didn’t deliver the additional money.

The federal promises instead jump-started a merry-go-round of unabated spending despite alarming subsidies by many public research universities. Universities bid up compensation for senior research professors. Administrative costs surged as universities managed the business end of research. Meanwhile, states cut back on financial support to higher-ed, and student loans filled the spending gaps with more debt. The federal government, private enterprise, and non-profits who sponsored and benefited from the arrangement, made off like bandits, loading costs onto the shoulders of the public universities.

Citizens and students, along with departments and teachers that taught undergraduate students were the losers. Undergraduate Arts and Sciences, trade schools, and business schools typically are profitable in the sense that their tuition revenue exceeds costs. These institutions teach courses indispensable for maintaining an educated citizenry and a functioning republic. But they generate little in the way of outside research dollars, so colleges and universities plunder them to subsidize losses in the prestigious hard sciences that teach only a small percentage of America’s undergraduate students.

Suggested reading whose statistics and commentary underpin this article include the following:

Science and Engineering Indicators 2018, by National Science Board of National Science Foundation, as that Board judges the US Higher Education System regarding Science and Engineering Education.

Academic Research in the 21th Century: Maintaining Scientific Integrity in a Climate of Perverse Incentives and Hyper competition, Published in Environmental Engineering Science in 2016 written by Marc Edwards and Siddhartha Roy, of Virginia Tech.

Science Is Broken by Roy and Edwards of Virginia Tech published in Aeon Magazine, Nov, 2017

Reform the Funding Model for the University of California, Jan. 12, 2015, by Charles Schwartz.

Finances of Research Universities, June 2014, by Council of Governmental Relations (COGR).

National Science Foundations (NSF) annual Higher Education Surveys of Federally sponsored Research from 1956 to 2012).

National Science Foundation (NSF) 2012 Report Diminishing funding and Rising Expectations: Trends and Challenges for Public Research Universities.

The National Academies: Research Universities and the Future of America published in 2012.

Finances of Research Universities, June 2008 report, by Council of Governmental Relations (COGR).

Finances of Research Universities, June 2004 report, by Council of Governmental Relations (COGR).

Losing the Big Picture: The Fragmentation of the English Major since 1964, by the National Association of Scholars.

The Great Mistake by Christopher Newfield, published 2016, by Johns Hopkins University Press.


Bacon’s Rebellion post March 28, 2013 More Big Tuition Hikes Ahead for  UVa

Bacon’s Rebellion post April 5, 2013, Woo Wows Wahoo Alumni.

Bacon’s Rebellion post Feb 20, 2017, Faculty “Costs per Enrolled Student” Varies Greatly.

Bacon’s Rebellion post Feb 23, 2017, Do Virginia Universities Give Excessive Aid to Out of State Students?

Bacon’s Rebellion post May 19, 2017 Running in Neutral: a k-2 and Higher Ed Scandal

Bacon’s Rebellion post Sept 27, 2017, Making the Case for More Higher Ed Investment.

Bacon’s Rebellion post April 6, 2017, Virginia Tech OK’s Intelligent Infrastructure Initiative.

Bacon’s Rebellion post April 17, 2017, Business and Computer Science Majors are the Biggest Bargains in Higher Ed.

Bacon’s Rebellion post April 11, 2017 Author Files Suit to Spur Investigation on UVa Admissions

Bacon’s Rebellion post May 2, 2017, Online Education Marches On

Bacon’s Rebellion post May 17, 2017, Is it Time for a Son-of-Restructuring Act for Higher Ed?

Bacon’s Rebellion post June 9, 2017 No, Reduced State Subsidies Do Not Drive Tuition Increases.

Bacon’s Rebellion post Oct. 17, 2017 Plumbing the Mysteries of College Education Data.

Bacon’s Rebellion post Oct. 24, 2017, Faculty Unrest at Virginia Tech.

Bacon’s Rebellion post Nov. 9, 2017, The Research Crisis in Higher Education

Bacon’s Rebellion post Nov. 10, 2017, Toxic Brew: Relativism and Globalism

Bacon’s Rebellion post Nov 17, 2017, Gross Versus Net in College Tuitions.

Bacon’s Rebellion post January 4, 2018, Let’s Collect Higher-Ed Employee Productivity Data.

Bacon’s Rebellion post of January 23, 2018, Does Undergraduate Tuition Subsidize Debt

Bacon’s Rebellion post of January 15, 2018, The Reform Agenda of Virginia’s Higher Ed Critics.

Bacon’s Rebellion post Jan. 16, 2018, American Higher Ed: Innovative, Adaptable, Transformative.

Bacon’s Rebellion post Jan. 16, 2018,  Make College Trustees More Accountable to Students, Taxpayers

Bacon’s Rebellion post of January 17, 2018, The Only Thing Worse Than a Tuition Cap … is no Tuition Cap.

Bacon’s Rebellion post of Feb. 2018, Even Progressives Acknowledge the Failure of Indiscriminate Student Loans.

Bacon’s Rebellion post March 25, 2018, Deciphering Higher Ed Statistics.