Higher Ed Got More Money This Year. So Why Are Colleges Still Broke?

Colleges and universities across the United States are facing some difficult financial decisions. From freezing hiring and cutting academic programs to delaying infrastructure investments, institutions are looking for ways to manage their expenses.

But here’s what’s interesting: public funding for higher education has actually increased in recent years. So why are so many universities still struggling financially?

According to the National Education Association’s State Funding Update, state appropriations for higher education reached $129 billion in FY2025, a 4% increase from the previous year. However, inflation brought that growth down to just 2%, while 17 states experienced inflation-adjusted funding declines. Even more concerning, 12 states had yet to recover their total inflation-adjusted funding to pre-pandemic levels.

The problem didn’t emerge overnight. Many public universities entered the pandemic without fully recovering their per-student funding from the 2008 financial crisis. Since then, rising operating costs, changing enrollment patterns and uncertainty surrounding federal research funding have added further complications. Even when state governments increase their investments, the additional funding may not be enough to keep pace with institutional expenses.

And universities cannot simply raise tuition every time their expenses increase. Students and families are already concerned about affordability, while some states impose limits on tuition increases. This leaves institutions with difficult choices about where to allocate resources and which investments they can afford to postpone.

Of course, the situation isn’t the same everywhere. Some states have increased their investment in public higher education, while others are still trying to recover from previous funding reductions. Similarly, a large research university with multiple revenue sources has more options than a regional institution or a tuition-dependent private college.

All of this raises an important question: How grave is higher education’s funding crisis? Is the sector experiencing another period of financial uncertainty, or are these challenges exposing deeper weaknesses in how universities are funded? More importantly, how can institutions maintain educational quality, support students and plan for long-term growth when their financial outlook remains so unpredictable?

More funding does not necessarily mean more money per student

At first glance, an increase in government funding sounds like good news for higher education. But what happens when student enrollment grows faster than the funding available to support it? Universities may receive more money overall while having fewer resources to spend on each student.

This is precisely what happened in FY2025. According to the State Higher Education Executive Officers Association (SHEEO), inflation-adjusted state and local education appropriations increased by 2.6%, reaching $130.7 billion. However, public college enrollment grew by 3.6%. As a result, funding per full-time-equivalent student fell by 1% to $12,082, marking the first decline after 12 consecutive years of growth.

The difference may appear small, but its implications are significant. More students mean greater demand for classrooms, faculty, academic advising, financial aid administration and campus facilities. When funding fails to keep pace, universities must find ways to accommodate growing enrollment without a corresponding increase in resources.

Tuition revenue isn’t necessarily filling that gap either. SHEEO’s FY2025 report found that inflation-adjusted net tuition revenue per student declined by 3.5%, while total education revenue per student fell by 1.9%. In other words, even with additional public investment, universities had less education revenue available per student than in the previous year.

The situation becomes more complicated when we look at individual states. According to the National Education Association’s State Funding Update, Arizona and Alabama experienced inflation-adjusted reductions of approximately 9–10% in state higher education funding in FY2025. At the same time, public enrollment was estimated to have increased by 6% in Arizona and 3% in Alabama. Universities in these states were therefore facing the challenge of accommodating more students while receiving less state funding in real terms.

However, the national picture isn’t entirely negative. Inflation-adjusted education appropriations per student were still 16.4% higher in FY2025 than in FY2019, before the pandemic. Yet 24 states remained below their pre-Great Recession per-student funding levels, demonstrating how uneven the recovery has been.

For university leaders, the distinction between total funding and per-student resources is crucial. An institution’s financial position cannot be judged solely by the size of its annual allocation. What matters is whether that funding can support the students it serves, absorb rising costs and leave sufficient room for investments in academic quality and future growth.

The revenue model is being pressured from multiple directions

Universities have traditionally relied on a combination of government funding, tuition fees, research grants and private contributions. The challenge today is that several of these revenue streams are under pressure simultaneously, leaving institutions with fewer options for compensation when one falls short.

Tuition offers a good example. While universities may consider increasing fees to offset reduced public funding, affordability concerns and state-imposed tuition limits restrict how far they can go. Yet many institutions depend heavily on this income. According to SHEEO’s report, tuition and fees accounted for 38.4% of public higher education’s total education revenue in FY2025. At public four-year institutions, that share was considerably higher, at 48.8%.

Research funding introduces another layer of uncertainty. The National Education Association’s 2025 funding brief highlighted proposed federal caps on indirect research cost reimbursements, which help universities cover expenses such as laboratory, utilities, administrative and compliance costs. Although several proposed caps faced legal challenges, the uncertainty complicated financial planning for research-intensive institutions.

The underlying problem is that universities cannot always replace lost revenue simply by increasing tuition, attracting more students, or securing additional research grants. Each option brings its own limitations, while essential operating expenses continue regardless of funding fluctuations.

For institutional leaders, this raises a larger concern: how sustainable is a financial model in which multiple revenue sources can become unpredictable at the same time?

The crisis is not equally distributed

The funding crisis looks very different depending on which institution you examine. While some universities are struggling to maintain existing programs, others have benefited from increased public investment. According to the National Education Association’s 2025 funding report, 25 states had surpassed both their FY2020 and FY2024 inflation-adjusted funding levels. Meanwhile, 12 states were still operating below their pre-pandemic levels.

The differences become more apparent when we look at how institutions generate revenue. According to SHEEO, tuition and fees accounted for 48.8% of total education revenue at public four-year institutions in FY2025, compared with just 19.4% at two-year colleges. This makes four-year institutions more exposed to changes in tuition revenue, while community colleges generally depend more heavily on public funding.

Financial reserves and access to alternative revenue sources add another layer to this divide. Large research universities may be able to draw on endowments, private donations and research grants, whereas smaller regional institutions often have fewer options. However, a diversified revenue base doesn’t eliminate financial risk. Research-intensive universities, for instance, are particularly exposed to disruptions in federal research funding.

As a result, two universities facing similar reductions in government support can experience very different financial consequences. One may absorb the shortfall through reserves or alternative revenue, while another may have little choice but to reconsider its academic offerings, staffing, or campus operations.

Enrollment growth no longer guarantees financial stability 

For universities, attracting more students has traditionally been an important part of increasing revenue. However, enrollment growth and financial growth do not always move together.

Consider the growing reliance on tuition discounts. According to NACUBO’s 2025 Tuition Discounting Study, 258 participating private nonprofit institutions estimated an average tuition discount of 57.1% for first-time, full-time undergraduates in 2025–26. These discounts can make education more affordable and help institutions attract students, but they also reduce the tuition revenue collected per student.

At the same time, the pool of prospective students is changing. WICHE projects that the number of U.S. high school graduates will decline by 13% between its projected 2025 peak and 2041. The impact will vary geographically, creating different recruitment challenges for institutions depending on their location and student population.

These developments make enrollment planning a more complicated financial exercise. Universities must consider not only how many students they can recruit, but also the financial aid required to attract them, the revenue they will generate and their likelihood of remaining enrolled.

An institution could achieve its enrollment target while falling short of its revenue expectations. Conversely, improving retention or attracting students to existing programs with available capacity could strengthen its finances without a substantial increase in overall enrollment.

Cost cutting alone cannot fix a structural funding problem

When budgets tighten, reducing expenses is often the first response. Universities freeze hiring, postpone infrastructure projects, consolidate departments, or discontinue underperforming programs. These measures may provide immediate financial relief, but what happens when the same financial challenges return the following year?

According to NACUBO’s 2026 survey of 620 higher education business professionals, rising costs, workforce pressures, financial uncertainty and institutional transformation are among the sector’s major concerns. The findings point to a challenge that goes beyond balancing annual budgets: institutions must find ways to manage today’s expenses while preparing for tomorrow’s needs.

Consider deferred maintenance. Postponing repairs or technology upgrades might save money today, but it can lead to more expensive problems later. Similarly, reducing administrative staff without improving existing processes may simply leave fewer employees handling the same workload.

This is where universities need to look beyond traditional cost-cutting. Sharing administrative services, making better use of existing facilities, simplifying manual workflows and exploring additional revenue sources can help address underlying inefficiencies. Technology has a role to play, but investments need to demonstrate measurable value rather than introduce another layer of expense.

The larger issue is that universities cannot continually reduce their way to financial sustainability. At some point, they need to reconsider how they operate, where they invest and which activities are essential to their long-term academic and financial health.