How Colleges Make Money

Colleges and universities have numerous ways of generating revenue to run their budgets and educate their students. These include the tuition and fees that students pay to earn their degrees. In turn, graduates can reap substantial rewards: Getting an education has long been associated with higher lifetime earnings—for example, a bachelor's degree, on average, is worth $2.8 million in lifetime income.

But making money can be challenging for schools of higher education when attendance lags. For the fall 2021 term, total college enrollment fell by 2.7%, or 476,100 fewer students. Lower enrollment numbers can increase the pressure on schools to find new ways to generate revenue—or force them to cut their budgets, increase tuition, or even close their doors.

Sources of College Funding

Colleges and universities can receive funding in a diverse range of ways. Where a school gets its money from can depend on whether it's a public or private institution, or if the school in question operates on a for-profit or not-for-profit basis.

For starters, colleges and universities, including both two- and four-year schools, receive significant funding from the federal government. In 2018, for example, the government paid out $149 billion to colleges and universities. This money was provided to schools in three ways:

• Student aid, including grants, scholarships, work-study, and loans
• Grants for research
• Contracts for goods or services

And all types of schools receive tuition revenue and other non-federal funding revenue, but how the formula works differs by type.

How Public Universities Make Money

Tuition and fees paid by students represent a large share of the funding pie for public colleges and universities. For the 2021–22 academic year, the typical student attending a four-year public college on an in-state basis paid $9,349 in tuition; on average, out-of-state students paid $27,023.

State universities also receive funding from state tax revenues, but that amount has decreased significantly in recent years. A Center on Budget and Policy Priorities (CBPP) study reports that two- and four-year colleges got over $6.6 billion less (in inflation-adjusted dollars) in the 2018 school year than in 2008. States spent 13% less per student overall, and six states spent over 30% less. One result of this decline in state funding is a 37% tuition rise since 2008, according to the CBPP report.

Endowments are another revenue source. An endowment is money that's invested in a college or university with the goal of supporting its mission. Schools that receive endowments may use this money to fund research projects or to expand aid packages for eligible students. The median endowment of public colleges and universities is $35.4 million.

How Private Colleges Make Money

Private colleges and universities also generate revenue by charging students tuition—considerably higher tuition than at public colleges. For the 2021–22 academic year, the average cost of tuition and fees at a four-year private university was $35,807. That means the loss of even one student could mean losing nearly $150,000 in revenue from tuition over the course of four years.

Aside from tuition, private schools also receive funding through endowments. The median endowment for private colleges and universities is $37.1 million, though some schools have much larger endowments. Harvard University's endowment, for example, distributed $2 billion in the fiscal year ending June 30, 2021. This money was used to fund specific academic programs and scholarships offered by the school. Large endowments mean that some schools are able to offer very generous scholarships to offset their high tuition costs.

For-Profit vs. Not-for-Profit Schools

Whether a school operates on a for-profit or nonprofit basis can influence how it makes money and how much it costs students to attend. It can also influence the quality of the education a student receives and how money is reinvested into the school's education programs.

Harvard, for example, is a private university that operates on a nonprofit basis. That means the money it receives from endowments, tuition, or other avenues is reinvested into the school. As a nonprofit, the school also enjoys tax-exempt status at both the federal and state levels. Though Harvard offers a top-notch education, it also comes with a $54,768 annual tuition bill for full-time students.

Tuition made up 17% of Harvard's total revenue for 2021, with endowment income accounting for 39% of revenue. Research grants, gifts, and other sources of funding accounted for the rest of the school's revenue numbers.

Contrast Harvard's tuition costs with those of Full Sail University, a private for-profit school located in Winter Park, Florida. Full Sail charges anywhere from $45,500 to $89,000 in tuition and fees to earn an undergraduate degree. According to its Dun & Bradstreet (D&B) profile, the university generates $93.27 million in revenue annually.

Sports and College Funding

Sports can be a big moneymaker for public and private colleges and universities. The typical revenue for athletic departments at public schools, for example, reached $125 million in 2018. Collectively, college sports bring in some $14 billion in revenue for schools annually.

Some of the most popular—and most profitable—sports for colleges and universities are men's football and men's basketball, followed by other men's sports and women's sports, respectively. In terms of how this money is spent, it's primarily distributed among student aid packages, facility and equipment upgrades, and coaches' salaries.

How much revenue a school can generate from sports can depend on how popular its teams are in the competitive landscape. An NCAA Division I school that has a sizable student body, thousands of alumni, and a long-standing rivalry with another Division I school, for example, may reap bigger revenues than a smaller private school that competes in a lower division.

Athletic revenues also depend on forces beyond a school's control. The cancellation of the 2020 March Madness tournament due to the COVID-19 pandemic, for instance, meant that the NCAA distributed just $246 million to Division I schools and conferences in 2020 compared to the $611 million distributed in 2019.

What Loss of Revenue Means for Schools

A continuing decline in college enrollment could increase pressure on both public and private universities, for-profit or nonprofit, to make up for financial shortfalls. For some, that may mean cutting budgets so that operating costs are more aligned with revenues. For others, it may mean rethinking revenue sources.

Raising tuition and fees, for example, could help schools make up lost revenue from a smaller group of students. But a tuition hike could be a double-edged sword if it leads more students to look for less expensive schools or forgo a college degree altogether. Lowering tuition rates, on the other hand, could attract students who are looking for affordability. But that alone may not be sufficient to increase revenues, much less return them to pre-pandemic levels.

Government funding could be increased to help support public colleges and universities. But there has to be support for that type of initiative in Congress, and it has to be balanced with other budgetary concerns. There also has to be public support because increasing college funding could mean tax hikes.

The Bottom Line

The pandemic has highlighted the dependence of colleges and universities on tuition—and demonstrated how increasingly unaffordable college is becoming for many students. Schools will need to be strategic in managing their finances and driving enrollment to avoid the possibility of a worst-case scenario. That scenario—the college closing completely or disappearing into a merger with a stronger institution—has become increasingly common in the past two years.