Forty years ago, collegiate institutions competed to attract the last big surge of baby-boomer 18-year-olds, offering campus amenities—fancy dormitories, swanky recreation centers with climbing walls, upgraded athletic facilities, palatial dining halls—that were, at the time, derisively described as an “arms race” among schools.
I once asked the then-president of my own alma mater—an east coast liberal arts college—how the school justified spending money on such frivolous student-centered amenities. Shrugging her shoulders, she responded, “Well, the students expect it,” as though such campus features were considered a sine qua non to recruit the student applicants whom the college hoped to enroll.
Later, the collegiate “arms race” shifted to focus on varsity athletics. The race for better coaches is reflected in the annual headlines about million-dollar salaries as coaches move from one school to another for more money and better perquisites. The race to enroll illustrious athletes who can assure winning teams is reflected in the stories about athletic recruiting violations and academic scandals.
But those earlier arms races over campus amenities and collegiate athletics are now history, as institutions move on to newer modes of competition. The next battleground features technology, institutional classifications, and research grant indirect costs, as we are beginning to see.
Indirect Costs (IDC) on Federal Research Grants
On February 7, 2025, the National Institutes of Health (NIH) announced an IDC rate cap of 15 percent for new and existing federal research grants. If this policy takes effect as announced, the IDC revenue flowing to research universities and research institutions could decline by as much as $4 billion annually. NIH research grants—often quite large and awarded with a five-year duration—support much of the federally-sponsored medical and basic science research performed at US universities.
One could easily have predicted the objections from educational and political quarters. Some in Congress complained that such a funding reduction would harm medical research, jeopardizing future cures and treatments that benefit Americans.
On February 10, numerous plaintiffs—including the Association of American Medical Colleges, the Association of American Universities, the American Council on Education, the Association of Public and Land-Grant Universities, and 13 major research institutions such as Brown University, University of California, University of Chicago, Massachusetts Institute of Technology, and Cornell University—filed a lawsuit against defendants Health and Human Services (HHS) and NIH in Massachusetts federal district court. The day of the lawsuit’s filing, a federal judge paused implementation of the 15 percent IDC cap, pending a court hearing later in the month. It remains unclear at this time how this matter may be resolved.
How Indirect Cost Rates Are Calculated
IDC rates—typically over 50 percent at most universities—result from institutional negotiations with the federal government. Some examples of IDC rates among major US research universities:
Once a university principal investigator proposes the direct costs (DC) of doing the proposed work and providing the proposed research results, IDC must be added, and proposals are then judged on their merits and their alignment with the federal sponsor’s objectives announced in a request for proposals. Being awarded a research grant is a coup for both the principal investigator and his university. Receiving grant awards is an important measure of an investigator’s professional merit, and also pays some portion of his salary (as well as the salaries of other supporting staff working on the research project) for the duration of the grant.
Most federal agencies, including NIH, normally award IDC as add-ons to direct costs, to produce a total research award. For example, 15 percent on a $100,000 direct cost grant award would produce $15,000 IDC added to DC, for a total award of $115,000. NIH uses this calculation.
Other federal granting agencies, however, specify that IDC be a percentage of total funding rather than a percentage of direct costs. In the previous example, using a 15 percent IDC rate, the IDC amount represents only 13.4 percent of the total award ($15,000 IDC divided by total award amount $115,000). Federal agencies that use this calculation will award only 13.4 percent IDC rather than the higher 15 percent IDC amount.
How Institutions Are Designated as Research Universities
Prior success in receiving federal research grants will earn institutions the vaunted research designation in the Carnegie Classification of Institutions of Higher Education, and, at the same time, assure that they remain competitive in receiving future grant awards. In other words, success breeds success in this grantsmanship “arms race.”
Meanwhile on a related—but somewhat separate—matter, the American Council on Education reports that the Carnegie Classification of Institutions of Higher Education has now incorporated several additional institutions with Research-1 (R-1) and Research-2 (R-2) status, both prestigious designations, and added a new category of doctoral/professional universities. Competing for membership in these research-focused groups has become a feature of the new higher education “arms race.”
To achieve R-1 status, a university must spend at least $50 million on total annual research and award at least 70 research doctorates annually. This status makes these institutions more competitive applicants for the largest available federal and private research grants, and enhances their ability to recruit and retain top students and faculty. Currently 187 institutions are now designated R-1, 41 more than in 2021 when institutions were last evaluated.
To achieve R-2 status, a university must spend at least $5 million on research and award a minimum of 20 research doctorates annually. This category currently includes 139 schools, up from 132 in 2021.
Recent additions to the R-1 Carnegie Classification include Michigan Technological University, located in the state’s rural Upper Peninsula, and the universities of Rhode Island, North Dakota, Wyoming, Idaho, and Vermont. Howard University in Washington, DC, is the first HBCU (Historically Black Colleges and Universities) institution to achieve R-1 status. All of these institutions will find their reputations enhanced, which improves their ability to recruit research-oriented faculty and students intending to major in science-technology-engineering-mathematics (STEM) fields.
A new Carnegie classification—Research College and Universities (RCU)—now includes Alabama State University and Fisk University. To achieve this status, schools must spend at least $2.5 million on research annually. Most of them confer few, if any, doctoral degrees, although the arms race to become a designated research institution can create perverse incentives to add doctoral programs not central to their educational missions.
In addition to these doctorate-research classifications, other Carnegie categories include master’s colleges and universities, baccalaureate colleges, baccalaureate/associate’s colleges, and associate’s colleges. Although few of these institutions are research-focused, or tend to recruit students or faculty on the basis of their research interests and credentials, inclusion in the Carnegie rankings adds prestige to their image.
Why the Hullabaloo Over Research Classifications and Indirect Cost?
In order to understand the significance of this shift to a newer form of the collegiate “arms race,” one need look no further than the old adage “follow the money.” The higher education industry—characterized by non-price competition among institutions—receives large federal subsidies that have contributed significantly to institutional advancement and survival.
Universities focusing on grant-funded research and production of doctoral degrees—with undergraduate student instruction often an ancillary activity—are in the business of selling their research products and services to the federal government and, in some cases, retaining rights to intellectual property and income streams resulting from the research. Institutions focusing primarily on undergraduate instruction rather than research are able to profit as a middleman dispensing student financial aid—particularly through the federal student loan program—an indirect source of higher ed institutional support.
Note, however, that institutions primarily emphasizing instruction have no access to specific federal funding analogous to IDC. Rather, these schools can merely raise their tuition and ask students to take on debt to pay the tuition, thus shifting the cost burden to student borrowers.
For both research-focused and instructional-focused institutions, the higher ed establishment and the federal government are mutually dependent on one another. This is why a proposed NIH 15 percent cap on IDC prompts such dire reactions from the educational establishment. Honing in on a particular expenditure such as IDC has revealed money flows that one or more recipients prefer to keep less publicly visible.
The NIH 15 percent IDC cap may be considered an initial effort to attenuate the symbiosis between the higher ed establishment and the federal government. The establishment should be relieved that NIH has at this time proposed nothing more drastic than that 15 percent cap on IDC.
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