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Federal Funds for Higher Education

History, Federal Support for Students, Federal Support for Research

The federal government plays a critical role in providing financial support for higher education. In fiscal year 1996 approximately $40 billion, or one-fifth of the total revenue received by degree-granting institutions of higher education, originated from the federal government (National Center for Education Statistics). These funds generally are provided in two forms: through direct support to colleges and universities, generally for research or facilities; and through grants and loans made to students enrolled in postsecondary institutions.

This support inevitably comes with political strings attached. The federal government, as does any political entity, establishes program and policy priorities, and expends funds in support of those priorities. The provision of federal funds generally brings along with it rules and regulations that govern how the funds can be used. Recipients of these funds, whether higher education institutions or their students, must agree to comply with these regulations as a condition of their receipt. Throughout history, the relationship between the federal government and higher education has changed, and along with it has been a change in the priorities and regulations with which federal funds are provided to higher education.


Throughout U.S. history, overriding federal polices on higher education have been noteworthy chiefly by their absence. Federal policies have usually been implemented through appropriations rather than general rules and regulations and have thus affected only selected kinds of institutions, programs, students, and faculty. Even the unrestricted grants of four million acres of federal land, which helped to support universities in seventeen of the twenty-one new states established before the Civil War, were confined to public institutions.

The Morrill Act of 1862 strengthened the budding network of state universities by granting public lands (or the equivalent in scrip) to every state for "the endowment … and maintenance of at least one college where the leading object shall be … to teach such branches of learning as are related to agriculture and the mechanic arts … in order to promote the … education of the industrial classes." By 1890 at least twenty new public institutions had been established under the act, and another twenty institutions had expanded or had been placed under public control. The Second Morrill Act of 1890 provided additional annual grants to certain fields of practical instruction but not to the other scientific and classical studies that the 1862 act had embraced.

Gradually, between the Civil War and World War I the principles that continue to govern many federal programs developed: (1) the annual subvention of designated kinds of education and research;(2) the retention by the federal government of the authority to review proposed plans before committing funds, to place conditions on their use, and to audit expenditures; and (3) the encouragement of practical studies and public service activities.

The next major expansion in federal programs came during the Great Depression, when federal outlays rose from $21 million in 1930 to $43 million in 1936. This represented an increase of from 4 to 9 percent of institutions' total annual income. In 1937 federal aid to students reached its peak during this era, when 139,000 students (11% of all students) received an average of $12 per month for undergraduates and $20 per month for graduate students as part of the National Youth Administration's work-study program.

Federal support for higher education expanded greatly during World War II, increasing to over $300 million in 1944. The bulk of this expansion was due to research spending in support of the war effort, though colleges and universities also supported the military by providing training courses to over 315,000 army and navy trainees.

Although military research slowed down with the close of World War II, the Servicemen's Readjustment Act of 1944 (more commonly known as the G.I. Bill) provided a new revenue stream for colleges and universities. In 1948 the federal government supported more than 1 million veterans in college, with payments for tuition totaling approximately $365 million, and another $1.3 billion provided to the veterans themselves for subsistence costs. As returning G.I.'s completed their postsecondary education and reentered the workforce, federal support for higher education began to decline. After peaking at $1.9 billion in 1949 (including subsistence funds for veterans), federal support declined and did not reach this level again until 1963.

The late 1950s saw the creation of the first generally available student loan program through the passage of the National Defense Education Act in 1958. This legislation, passed in response to the launching of the Sputnik satellite by the Soviet Union, sought to promote access to higher education as a means toward increasing the technological capabilities of the United States. Now called Perkins Loans, these loans were funded by providing capital directly to colleges, which in turn lent the money to students at highly subsidized interest rates. This era also saw a resurgence in federal support for research, particularly military research to support the cold war efforts of the nation.

The next major milestone in federal support for higher education was the passage of the Higher Education Act of 1965. Title IV of this legislation created the student grant and loan programs that still provided the foundation of financial aid support for students at the beginning of the twenty-first century. Provision of this support was based on the financial need of the students and their families; the aid–both grants and loans–was targeted at the nation's neediest students. In addition to the broad-based student aid programs, the Higher Education Act also provided direct funding for college libraries, historically black colleges and universities, and a number of smaller, specialized programs. The Higher Education Act has undergone reauthorization approximately every five years since its initial passage. With every reauthorization has come changes to how financial aid is provided to students and institutional support to colleges and universities.

Federal support for research has also grown since 1965. According to the National Center for Education Statistics, research support provided to educational institutions (the great majority of which goes to postsecondary institutions) has grown from $1.8 billion in 1965 to $21 billion in fiscal year 2000.

Federal Support for Students

Since the passage of the Higher Education Act of 1965, financial aid for students has been central to federal support for postsecondary education in the nation. In fiscal year 2000 the federal government provided $47.7 billion in financial aid to college students at both the undergraduate and graduate levels, a sum that represented 70 percent of all aid available that year. Just over half of this amount ($24.2 billion) was in the form of private loans guaranteed and subsidized by the federal government; the remaining amount was in the form of grants, work-study, and loan capital provided directly by the federal government. Federal funds for student aid more than doubled in constant dollars between 1975 and 2000, far outpacing the growth in enrollments of 28 percent during the same period.

The Higher Education Act has as one of its goals the equalization of educational opportunity for all students in the United States, seeking to remedy "the appalling frequency with which a student is presently forced to forego the opportunity of postsecondary education because of inability to meet the costs" (Mumper, p. 78). The provision of aid under Title IV of the act has been made almost exclusively based on the financial need of the student and his or her family. In the early years, the emphasis was on meeting the college access needs of poor students through the use of grants. When first fully funded in fiscal year 1975, Pell Grants, the foundation grant program, provided more than 80 percent of the cost of attendance (tuition, room, board, books, and other expenses) at a typical public, four-year institution. Loans were available for students who wanted to attend a more expensive institution.

Over the ensuing twenty-five years, the Pell Grant program did not keep pace with the rise in college costs. By fiscal year 2000 the maximum Pell Grant provided only 40 percent of the cost of attendance at a public four-year institution. While total Pell Grant spending had grown 691 percent over the preceding twenty-five years, federal loan volume had increased 2000 percent over the same period, thus shifting the foundation of the Title IV programs from grants to loans.

The loan programs, which like Pell Grants had initially been targeted at students from financially needy families, were opened up to all students in 1978. While Congress and the Reagan administration rescinded this change three years later, the income limits in the loan programs (and the limits on the amount of loans that could be taken out) were liberalized again in the 1992 amendments to the Higher Education Act.

Another important milestone in federal funding for higher education students was the passage of the Taxpayer Relief Act of 1997. This legislation, which created the Hope and Lifetime Learning tax credits for college tuition, was initially estimated to cost the government $40 billion in foregone tax revenue in its first five years, or slightly more than the estimate for Pell Grant spending during that period. Unlike Pell Grants, which are targeted at the nation's neediest students (those from families making less than $45,000 per year in 2000), the tax credits were made available to families with incomes of up to $100,000. The structure of the tax legislation helped shift even more federal resources away from the neediest college students and toward middle-and upper-income students.

The changes in the provision of federal support for college students since the passage of the Higher Education Act in 1965 can best be characterized as a shift away from meeting the college access needs of poor students to subsidizing college affordability for students from wealthier families. While the Pell Grant program continues to receive much attention in Congress and on college campuses, its position as the cornerstone of federal support for postsecondary education has been usurped by the emphasis on the use of loans and tax credits as alternative means for providing federal funding to students and their families.

Federal Support for Research

As noted earlier, federal support for research at educational institutions grew to reach a level of more than $21 billion in fiscal year 2000. These expenditures are generally tightly coupled with national priorities. For example, during the latter half of the 1970s, when the nation faced an energy crisis due primarily to the OPEC oil embargo, there was an expansion of funding for energy-related research. In the 1980s the focus turned back towards military research, as the Reagan administration and Congress created new defense initiatives. In the latter half of that decade, with the end of the cold war and the aging of the American populace, funding for health-related research grew fastest.

These changing priorities can be demonstrated by examining the amount spent by individual departments and agencies as a percentage of total federal research. In 1965 the Department of Defense represented 24 percent of all federally sponsored research at educational institutions. It dropped to approximately 10 percent of the total in the 1970s, before recovering in the 1980s to 15 percent. In fiscal year 2000 it stood at less than 8 percent of the total (National Center for Education Statistics). In contrast, spending by the Department of Health, Education, and Welfare in 1965 represented approximately 26 percent of total federal research. This share grew steadily (represented by the successor Department of Health and Human Services), reaching 44 percent of the total in 2000.

University-based research tends to follow the priorities established by the federal government. Most federally sponsored research is highly targeted, so that academic researchers need to adjust their research programs to attract federal dollars. Federal research dollars also bring with them support for indirect costs, those expenses associated with operating a large, complex university that cannot be directly attributed to specific research projects. Included in indirect costs are such items as library operations, plant maintenance, repair and operations, administrator salaries, and the costs of managing sponsored research on the campus.

Federally sponsored research has the effect of influencing not just the research agendas of faculty members, but also the decisions of students to enroll in doctoral programs. Doctoral students in most large research universities, particularly those in the sciences and engineering, commonly receive fairly generous fellowships and stipends. Most institutions depend upon sponsored research to support these students. As research dollars flow from sponsors, particularly the federal government, into and out of particular fields, financial support for students also varies. These dollars have the effect of influencing the decisions of students to enroll in specific fields, as well as the ability of universities to support them.

Through its financial support of both students as well as colleges and universities, the federal government has played an influential role in shaping the growth of the higher education industry throughout history. Even though the political and management control of institutions remains in the hands of states and private boards of trustees, the influence of federal funds for higher education is strongly felt by almost all of the institutions and by most students throughout higher education.


AXT, RICHARD G. 1952. The Federal Government and Financing Higher Education. New York: Columbia University Press, for the Commission on Financing Higher Education.

COLLEGE BOARD. 2000. Trends in Student Aid, 2000. Washington, DC: College Board.

MUMPER, MICHAEL. 1996. Removing College Price Barriers: What Government Has Done and Why It Hasn't Worked. Albany: State University of New York Press.

NATIONAL CENTER FOR EDUCATION STATISTICS. 2001. Digest of Education Statistics, 2000. Washington, DC: U.S. Department of Education.

U.S. NATIONAL ADVISORY COMMITTEE ON EDUCATION. 1931. Federal Relations to Education. 2 vols. Washington, DC: National Capital Press.


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