How Do Colleges and Universities Earn Revenue? 2019 Update

One of eLearning Inside’s most evergreen articles has proven to be our analysis of the National Center for Education Statistic’s (NCES) data that details, among other things, how institutions of higher education make and spend money. The article described a few surprising facts, like how tuition and fees account for just one fifth of what public universities earn, the important role that hospitals play in the mix, and just how big the higher education sector is counting institutions collectively. Since publishing, the NCES has updated their reports, and we’re taking this opportunity to provide updated data, discuss a few eyebrow raising statistics, and dig deeper into the subject of what universities earn.

The NCES compiles data from the Integrated Post-Secondary Education Data System (IPEDS). Institutions of higher ed need to participate in IPEDS to receive resources through Title IV federal student financial aid programs. In other words, for institutions to accept students who pay for their tuition in part via Pell Grants, Stafford Loans, or other federal programs, they need to submit relevant data to the Department of Education. The following presents insights from FY 2017, the latest for which data is available.

For reference: 20.14 million Americans enrolled in a degree-granting institution in 2017. Public four-year and two-year universities taught 14.67 million of them. Private non-profits taught 4.123 million, while for-profits taught 1.346 million.

The following insights will primarily focus on students who attended a four-year public or private non-profit institution or a two-year public college. The three groups represent 18.744 million of the total learners.

How Universities Earn: The Tuition Question

College tuition has been a major source of stress for learners for years. According to The College Board’s latest Trends in College Pricing report, published tuition and fees at public universities has more than tripled since 1988-89 (from $3,360 to $10,230 per year). For private non-profits, it has more than doubled from $17,010 in 1988-89 to $35,830 in 2018-19.

This, in part, has brought about an astronomical collective student debt burden of more than $1.5 trillion held by American learners—both those who received a degree and those who did not. But there are other factors to consider as well, like state appropriations, graduation rates, living costs, and more. Experts have long debated how best to bring down tuition, fees, and student debt.

So—how does tuition square with college revenues?

Public four-year universities earned a collective $66.4 billion from tuition and fees in 2017. This made up 20.6% of their gross revenue. In 2016, it made up 21.5% of the total.

Public two-years earned $9.25 billion, 16.5% of their total.

Private non-profits, meanwhile, brought in $73.31 billion from tuition and fees, which represents 30.3% of their total. This figure is notable. While it represents an increase from the $71.44 they earned in 2016, it marks a drop in percentage of total, down from 39.3%. (More on this drop later).

Tuition remains the largest source of income for public and private four-year institutions. But it’s far from the whole picture.

This complicated reality makes answering the student debt question all the more difficult. Besides tuition and fees, major sources of revenue include hospital services, grants and contracts, and auxiliary enterprises. At private non-profits, gifts and donations also make up a big chunk. At public non-profits, meanwhile, appropriations—especially from state governments—are nearly as important as tuition for an institution’s bottom line. See our 2018 article for a more detailed discussion of these factors.

At two-year public colleges, furthermore, tuition is not the greatest source of revenue. State and local appropriations make up 46.1%, dwarfing tuition’s 16.5% share of the whole. Tuition generally forms the most important chunk in terms of how universities earn revenue, at least at 4-year institutions. But it only represents a minority portion, and a successful campaign to bring down tuition and fees for students will likely involve other revenue streams.

The Investment Return Rollercoaster

One major source of income for institutions of higher ed is return on investments. The investments themselves might be diverse, but the returns they pay are all delivered in U.S. greenbacks and counted on a single line by the NCES.

Comparing FY 2016 with FY 2017 investment returns for private non-profits leads to an interesting disparity. Private colleges collectively lost money on their investments in 2016 to the tune of $2.74 billion. In 2017, they earned $48.83 billion from investments.

This massive rebound partially explains how, at private non-profits, tuition revenue rose, but accounted for a smaller percentage of the total.

What led to this turn around? There is no single answer.

Even professionals in the finance industry struggle to invest money reliably. Plotting this source of revenue over time, investment returns for private non-profit colleges marks by far the most varied graph of any single line item.

Using the NCES trend generator, one can see that investment return at private non-profits brought in $21.28 billion in 2015, $57.16 billion in 2014, $38.54 billion in 2013, and so on. In 2009, in the fallout of the Great Recession, private non-profits collectively lost $64.25 billion with their investments.

Public institutions invest as well, although not to the same extent. Their earnings and loses also vary essentially to the same extent as with private non-profits, but demonstrate shallower peaks and valleys. In 2017, public institutions (combining two-year and four-year universities) earned $13.78 billion from investments. In 2009, they lost $8.21 billion.

Public vs. Private

Comparing the revenue intake of public versus private non-profit universities in the U.S. provides a striking portrait of the higher education sphere. Four-year public schools taught more than double that of four-year private institutions: 8.853 million versus 4.058 million students, respectively. But private non-profits took in just 25% less total revenue of their public four-year counterparts. In 2017, four-year public schools earned $321.7 billion, while private non-profits took in $241.8 billion.

Two-year public institutions, meanwhile, earned $56.0 billion, though they taught 5.767 million learners.

Comparing tuition and fees alone, private schools actually grossed more than their public four-year counterparts—$73.3 billion (private) versus $66.4 billion (public). On average, four-year public university students paid roughly $7,500 in tuition and fees in 2017, while private university students paid roughly $18,000 on average. Again, this just represents tuition and fees. The total cost of college includes many other factors, like living expenses, textbooks, supplies, and more.

With that said, both types of institutions saw big year-over-year increases in revenue. Private non-profits brought in a collective $181.7 billion in 2016, versus $241.8 billion in 2017. Again, returns on investment alone explain $51.57 billion of this $60.1 billion jump. Public four-year universities earned $297.0 billion in 2016 and ramped up to $321.7 billion a year later. Again, investment income accounted for nearly $10 billion of this $24.7 billion increase.

This represents a few of the major changes in the income and revenue of American institutions of higher education and describes a few way universities earn revenue. Check back in next week for a rundown of how these colleges and universities spend these funds.

Correction: October 31, 2019. A previous version of this article mistakenly stated that public four-year institutions in the U.S. taught 14.67 million in 2017. This figure represents the total number of students who attended both four-year and two-year public institutions.

Featured Image: Ameer Basheer, Unsplash.