How Do Colleges Make Money? Explained!

There are a number of ways colleges and universities can generate revenue to run their budgets and educate their students. Among these is the tuition and fees students pay in order to earn a degree. In return, graduates can reap considerable rewards: An education is associated with higher earnings over the course of a lifetime – a bachelor’s degree, for example, is worth about $2.8 million.

However, making money can be challenging for colleges if attendance is low. Enrollment at colleges fell by 2.7%, or 476,100 fewer students, in the fall of 2021. In lower enrollment numbers, schools may be forced to find new sources of revenue, increase tuition, or even close their doors as a result.

How Do Colleges Make Money?

How a school earns money and how much it costs to attend can vary depending on whether it is for-profit or nonprofit. Additionally, it can impact the quality of education a student receives and how money is spent on the school’s educational programs.

Harvard, for instance, is a private nonprofit university. It is reinvesting the money it receives from endowments, tuition, and other sources. In addition to its federal and state tax-exempt status, the school is a nonprofit organization. Harvard offers an excellent education at a cost of $54,768 for a full-time student.

For 2021, Harvard’s revenue was made up of 17% tuition and 39% endowment income. Rest of the school’s revenue came from research grants, gifts, and other sources.

Compared to Full Sail University, a private for-profit institution located in Winter Park, Florida, Harvard’s tuition costs are much higher. An undergraduate degree at Full Sail can cost between $45,500 and $89,000. The university generates $93.27 million in revenue according to its Dun & Bradstreet (D&B) profile.

The sources of income for colleges and universities include endowments, gifts, tuition and fees, athletics, and grants. International enrollment fees are also a source of income.

Below is a breakdown of the primary sources of income for colleges:

1. College Funding

Various types of funding are available to colleges and universities. If a school is public or private, or if it operates on a for-profit or not-for-profit basis, it may receive its funding in one of two ways.

The federal government provides significant funding to colleges and universities, including both two-year and four-year schools. The government spent $149 billion on colleges and universities in 2018. There were three ways to provide this money to schools:

  • Loans, grants, scholarships, and work-study programs for students
  • Funding for research
  • Services or goods contracts

The formula for calculating tuition revenue and other non-federal funding revenue differs by type of school.

2. Tuition Fees

A large portion of public colleges and universities’ funding comes from tuition and fees paid by students. On average, in-state students attending a public four-year college paid $9,349 in tuition in 2021–22; out-of-state students paid $27,023.

Tax revenues also fund state universities, but the amount has declined significantly in recent years. A study by the Center on Budget and Policy Priorities (CBPP) states that two- and four-year colleges received over $6.6 billion less (in inflation-adjusted dollars) in the 2018 school year than in 2008. Six states spent more than 30% less per student than they did in 2011. According to the CBPP report, this decline in state funding has led to a 37% increase in tuition since 2008.

Private universities and colleges generate revenue by charging students much higher tuition rates than public schools. 

A four-year private university’s average tuition and fees for the 2021–22 academic year was $35,807. Over the course of four years, even the loss of one student could cost nearly $150,000 in tuition revenue.

3. Endowments 

Endowments are another source of revenue. An endowment is a form of investment that supports the mission of a college or university. The money received from endowments can be used to expand aid packages for qualified students or to fund research projects. In the United States, a public college or university has an endowment of $35.4 million.

Private schools receive funding through endowments. Private colleges and universities have an average endowment of $37.1 million, but some have much larger endowments. In the fiscal year ending June 30, 2021, Harvard University’s endowment distributed $2 billion. 

Specifically, these funds were used to fund academic programs and scholarships offered by the school. Because some schools have large endowments, they can offer very generous scholarships in order to offset their high tuition costs.

4. Sports

Both public and private colleges and universities can make a lot of money from sports. Public schools, for example, reported a typical revenue of $125 million in 2018. A total of $14 billion in revenue is generated annually by college sports.

Football and basketball are among the most popular-and most profitable-sports for college and university athletic departments, followed by other men’s sports and women’s sports, respectively. It is primarily spent on student aid packages, upgrades to facilities and equipment, and coaches’ salaries.

Sports revenue can be affected by how popular a school’s teams are in the competitive landscape. If a university has a large student body, thousands of alumni, and a long-standing rivalry with another university, it may earn greater revenues than a smaller school that competes in a lower division.

A school’s athletic revenue is also influenced by forces beyond its control. Because of the COVID-19 pandemic, for example, the NCAA distributed just $246 million to Division I schools and conferences in 2020 as opposed to $611 million in 2019.

Financial Pressures for Colleges

As college enrollment declines, both public and private universities, for-profit and nonprofit, could face increased financial pressures. In some cases, that means cutting budgets in order to align operating costs with revenues. In others, it may mean changing revenue sources.

By increasing tuition and fees, schools could make up lost revenue from fewer students. A tuition hike, however, could be a double-edged sword if it leads to young people opting out of college altogether or looking for cheaper options. In contrast, lowering tuition rates may attract students seeking affordability. However, that may not be enough to restore revenues to prepandemic levels, much less increase them.

The government could increase funding for public colleges and universities. This type of initiative must be supported in Congress and balanced with other budgetary concerns. As part of increasing college funding, there must also be public support.

People Also Ask FAQs

Why Is the Price of College so High?

Supply and demand can sometimes cause college tuition prices to rise. College tuition can increase as more people pursue college degrees. Inflation also increases college tuition rates. University tuition may increase when enrollment drops in order to make up for financial shortfalls.

Do Colleges Make a Lot of Money?

This depends on how much tuition they charge, how much federal or non-federal funding they receive, and how profitable their athletic program is. A larger and more well known school-or one that is more exclusive-is likely to make more in tuition and athletics.

How Do Colleges Spend Their Money?

Scholarships, student aid, and athletic programs must be funded by non-profit colleges and universities. All of a for-profit institution’s revenues are not required to be reinvested in school operations.

Final Words

College has become increasingly unaffordable for many students due to the pandemic’s impacts on college tuition. Managing finances and driving enrollment will be critical for schools to avoid a worst-case scenario. In the past two years, colleges that have closed or merged with stronger institutions have become increasingly common.

Leave a Comment

COVID-19 Took My Waiter Job, Then I Made 5-Figures From Home...Discover How I Did It!