Breaking down higher education's financial frontier

Colleges and universities are grappling with intensifying financial pressures, compounded by uncertainty surrounding federal funding sources. In response, institutions are taking action to mitigate costs: Stanford University has implemented a hiring freeze, Penn State University is considering the closure of twelve commonwealth campuses due to enrollment challenges, and St. Francis College has gone as far as conducting layoffs and selling its Brooklyn campus.

As institutions confront the reality of these financial challenges, it becomes increasingly important to analyze and understand the underlying factors that contribute to their fiscal health. EAB’s analysis of IPEDS data (FY2022) and university budgets for public, private, and research-intensive institutions helps leaders better understand and communicate how reliant institutions are on certain revenue streams as well as their largest expense categories.

This blog unpacks key findings across all analyses, including similarities and differences between each segment.

Key findings on revenue and expense trends from EAB’s analysis

1. Institutions across segments are highly dependent on two key revenue streams: tuition and government funding

Most revenue, across all segments, comes from tuition and fees and government funding. Decreases in either of these sources can significantly impact the financial sustainability of an institution, and alternative revenue sources, such as donations or auxiliary revenues, are rarely sufficient to fully compensate for potential losses. Revenues from auxiliary enterprises and private gifts make up only 10% for both public and research-intensive institutions.

While private institutions generate a larger percentage of revenue from these sources (28%), increased revenue requires significant investment and likely cannot recoup losses from declines in enrollment or government appropriations.

2. Academic costs make up at least 61% of expenditures

Percent of spending comprised of academic costs (instruction, academic support, student services, and research and public service expenses), by institution type

Historically, cost reduction efforts in higher education have focused on administrative functions, leaving fewer levers to pull in these areas. Over 60% of total expenditure comes from academic spending, meaning that any attempt to meaningfully reduce costs must involve evaluating opportunities within academic functions. Specifically, assessing instructional costs, including labor, as this is the largest portion of academic costs, ranging from 27-37% of costs across public, private, and research-intensive institutions.

3. Academic labor is the biggest driver of labor costs

Labor costs, which include salaries and benefits, represent a significant portion of total expenses across all segments—averaging 56%. It’s well known amongst higher education leaders that labor drives the majority of expenditures. What is less well understood is that academic labor makes up over 70% of salary expenditures, and over half of that is instructional salaries. While strategies to reduce labor costs are often difficult for leaders to consider, any attempts to reclaim significant savings must address labor, specifically academic salaries.

Key differences between public, private, and research-intensive institutions

While colleges and universities across segments share many features in their business models, there are nuances to how public, private, and research-intensive institutions operate.

Public institutions

These institutions are the most dependent on a single revenue source, receiving 61% of revenue from government funding. However, they are the least likely to be in a structural deficit, with only 21% of institutions posting a deficit in FY2022. This is likely due to state-level requirements that do not allow for budget deficits.

Private institutions

Private institutions have the highest percentage of revenue generated by auxiliaries (15%). Even with more diversified revenue streams, 67% of private institutions posted a structural deficit in FY2022. Given a high dependence on tuition revenue, these institutions are heavily impacted by enrollment declines across the sector.

Research-intensive institutions

Understandably, research-intensives have higher expenses in the research and public service (20%), and hospital (13%) categories. In fact, these institutions have a greater percentage of expenses related to research than instruction (33% vs. 27%). They also have seen greater investment returns than other segments, which could be due to better-resourced investment offices and/or higher endowments.

Conclusion

Higher education institutions operate on tight budgets with little room for error, making it essential for stakeholders to understand where funds are allocated and how they can be managed. By utilizing this infographic, campus leaders can foster informed discussions about financial strategies, identify areas for potential savings, and work towards a more sustainable financial future for their institutions.