Or subscribe now to read with unlimited access for as low as $10/month.
A free account provides you access to a limited number of free articles each month, plus newsletters, job postings, salary data, and exclusive store discounts.
Higher education takes in substantial revenue from the federal government. Colleges are funded by a mix of sources that varies by type of institution and includes tuition and fees; federal, state, and local-government funding; and investment income from endowments. Federal revenues currently make up about 27 percent and 17 percent of revenues at two- and four-year public institutions, respectively, and 17 percent of revenue at private four-year nonprofit institutions. The two main ways the federal government provides funding for higher education are student aid and federal funding for research.
Federal research funding is certainly at risk. The federal government spent close to $60 billion on scientific research in higher education in 2022. The impact of cuts to such R&D spending could be substantial, particularly for those institutions that heavily emphasize research. The Carnegie Classification system places 146 four-year colleges — just over 5 percent — in this category (labeled as “R1” institutions). Those with medical schools and engineering schools could be especially hard hit. Few specific details are available, but indirect statements from President Trump’s team indicate reduced support.
While Trump proposed similar cuts in his first administration, support for educational research actually rose slightly during that term. But new, broader pressures to reduce government spending or offset tax cuts could cause this administration to actually enact significant cuts. The largest negative shock to recent research funding occurred under President Barack Obama, following passage of the Budget Control Act of 2011. That law contained “sequestration” provisions that required across-the-board budget cuts in the following years. As a result, federal spending on academic research dropped by $6 billion, or 11 percent, between 2011 and 2014. For highly research-intensive institutions, a reduction of this magnitude under the new Trump administration would be damaging. If we assume that all such funding were awarded to R1 institutions (which is, of course, an overstatement), such a cut would reflect a $41-million drop, on average, in research funds per school.
Federal financial aid is also at risk. Pell Grants, federal work-study programs, and Supplemental Educational Opportunity Grants directly reduce the price that students pay for college. Pell Grants, the largest of these, totaled $31 billion in 2023-2024. They were not a direct target in Trump’s first term and they currently receive some measure of Republican support, so it does not appear that they face an immediate threat. The same cannot be said for the other two programs. Recent proposals sponsored by Republicans already exist to eliminate both of them. With Republican majorities in both houses of Congress and a Republican president, their future is in jeopardy. Although their elimination may be costly to some students and institutions, they are small programs, each costing around $1 billion annually.
Much public attention has focused on the issue of student-loan forgiveness, which the Trump administration likely will not support. But such a change would affect the federal budget (and the financial outlook for people with outstanding student debt), not college budgets. What matters for the institutional budgets is the availability of new federal student loans. These loans provide the greatest source of federal funding to cover educational expenses, now roughly $85 billion. Since 2010, though, the amount of inflation-adjusted new borrowing fell by almost half. Reduced enrollment and loan limits for federal direct loans that are fixed in nominal dollars contribute to that decline. Demographic changes unrelated to Trump — namely the significant decline in the number of college-age Americans — indicate enrollments may continue to fall.
Institutions may also need to help cover the cost of unpaid student loans. The CCRA’s accountability provisions could require institutions to provide annual payments to the federal government as reimbursement for the unpaid loan balances of former students. My calculations based on data from the House Committee on Education and the Workforce indicate that such provisions would cost four-year institutions collectively around $800 million per year once fully implemented. In the aggregate, this burden would not be excessive, but it may be for those institutions whose students borrow more and who struggle more in the labor market. That is by design — the legislation aims to penalize institutions that provide degrees that are expensive relative to their payoff in the job market. For instance, my calculations show that 38 tuition-dependent private institutions would face losing 10 percent or more of their revenues if the full force of these provisions becomes effective. To be clear, Trump has made no reference to this legislation, but it certainly has a greater likelihood of advancing through the process with a Republican president and Republican majorities in both houses of Congress.
Immigration restrictions and changes in international-student enrollment could represent a significant financial hit. International students make up about 4.7 percent of U.S. college enrollment, but their presence varies by institution. At some institutions, like New York University and Columbia University, the share of international students is much larger. International students typically receive limited financial aid and provide needed revenue for many colleges, paying around $30,000 per year to study in the United States. In the first Trump administration, immigration restrictions reduced the number of international students by 50,000 between 2016-17 and 2019-20. Once Covid hit, that number fell by another 150,000 students, although the financial impact on colleges was mitigated by federal subsidies. If international enrollment dropped by, say, 100,000 students in the upcoming Trump administration, that would reduce the revenue of American colleges by around $3 billion.
Taxes imposed on highly endowed institutions may rise. A small number of institutions possess enormous endowments and receive very large returns from investing those funds, which historically incurred no taxes. This arises from their classification as Section 501(c)(3) organizations, which exempts them from paying tax if they are “operated exclusively for … educational purposes.” Trump’s signature tax-reduction legislation, enacted in 2017 (the Tax Cut and Jobs Act), included a provision imposing a tax of 1.4 percent on the net investment returns of private colleges with endowments greater than $500,000 per student. In 2023, 56 institutions paid this tax. That legislation expires in 2025, and Trump is seeking to extend it. In 2023, then-Sen. JD Vance, Republican of Ohio, introduced legislation to increase the tax rate to 35 percent, although reducing the number of institutions affected. (Other legislation would expand the number of targeted institutions.) Increasing the tax rate to 35 percent would have a substantial impact on the finances of highly endowed institutions. My simulations indicate that it could cost each institution subject to such a tax upwards of $250 million per year, representing 23 percent of their annual budgets. More recent proposals include tax rates between 14 percent and 21 percent. Either way, such a levy would dramatically reduce annual spending and erode the value of their endowments over time.
The finances of most colleges and universities face negative prospective impacts from stated policy initiatives by the incoming administration and Congress. For some institutions, the negative impact could be large. The federal government may provide them with less revenue to support research and financial aid. They may also receive less revenue from international students if the federal government restricts their entry. If so, colleges will have to tighten their belts, but they have weathered such storms in the past. Institutions at the extreme ends of the financial distribution face even greater risks. A large increase in the endowment tax would impose extensive damage to the finances of the wealthiest colleges. Accountability provisions designed to reduce student-loan debt would have a greater impact on highly tuition-dependent institutions, generating existential risk for some of them. We will have to wait and see how these policies play out. But looking through the crystal ball today suggests that many colleges are in for a tough period financially.
A version of this essay previously ran in the online publication Econofact.
