Trump Plans to Shake Up Higher Education-Capping ‘indirect funds’ for researchers at 15% is a good start at curtailing the administrative bloat. WSJ

Jason L. Riley

A social-media post last month from the Trump administration triggered fainting spells throughout the academy. The National Institutes of Health, which funds biomedical research, announced that it is reducing the amount of money the government pays grant recipients for overhead costs.

According to NIH, $9 billion of the $35 billion that it granted for research last year “was used for administrative overhead, what is known as ‘indirect costs.’ ” A school that receives a grant typically gets an additional 50% of its modified total direct costs (which includes salaries, materials and supplies, services, travel and some subcontract payments) to cover these administrative expenses. At prestige schools such as Harvard, the overhead payments—for the use of buildings, electricity, support staff, etc.—can run as high as 70%. The Trump administration wants to cap this figure at 15%, which it estimates will save taxpayers more than $4 billion annually.

The labor economist Richard Vedder thinks this is exactly the shock to the system that higher education needs. “Of course the universities with heavy research grants are going crazy over this,” he told me. “But if you talk to anyone at a university, you know that those overhead costs are vastly inflated compared with the true marginal cost, or extra cost, to the university doing the research.” He added that many schools collect so much overhead money that they give some of it back to researchers as an incentive to apply for more research grants. “It’s kind of a con game, all based on false assumptions and faulty economics,” Mr. Vedder says. A nonnegotiable uniform rate would be far more efficient.

In a forthcoming book, “Let Colleges Fail: The Power of Creative Destruction in Higher Education,” Mr. Vedder argues that one of the biggest problems with higher ed today is that colleges aren’t sufficiently disciplined by market forces. The result is too much administrative bloat subsidized by the government. His subtitle is a reference to the free-market economist Joseph Schumpeter (1883-1950), who described capitalism as a process of “creative destruction” whereby markets reallocate resources from unproductive to productive uses. “It’s worked pretty well for American business,” Mr. Vedder said. “Why don’t we have it for higher ed?”

One problem, the book explains, is that universities are essentially wards of the state. “Colleges and universities are dominated by people operating outside of the normal profit-oriented private market economy,” Mr. Vedder writes. By his calculations, the productivity of university employees over the past 50 years has declined not only in comparison with the average U.S. worker but also in absolute terms. It took more faculty and staff to educate a college student in 2021 than it did in 1972.

The reality is that there are inefficiencies almost everywhere you look in higher ed. Start with our overly generous student-loan programs, which have caused tuition to rise faster than inflation because colleges know that the government is absorbing most of the cost. Far more people attend college today than stand to benefit from the experience, judging from the roughly 40% who don’t graduate and the fact that so many people who do get a degree wind up in jobs that don’t require one.

Meanwhile, college access for the poor—the intended beneficiaries of student loans—has barely budged over the decades. Mr. Vedder reports that the percentage of graduates who come from the bottom 25% of the income distribution is similar to what it was in 1970. If colleges want to accept students regardless of their chances of success, give schools “skin in the game,” he writes. Force colleges “to share in the costs of loan forfeiture if they accept a lot of mediocre students who drop out or fail to repay their student loans.”

You don’t need to be an expert in the economics of higher education to understand that academia is in decline. In a 2023 poll conducted by the National Opinion Research Center and The Wall Street Journal, 56% of respondents said that college was “not worth the cost because people often graduate without specific job skills and with a large amount of debt to pay off.” Worse, people who have most recently experienced college, those 18 to 34, are less likely than older cohorts to say the cost of college was worth it.

“If higher education can somehow change its ways and better emulate the market-oriented private economy,” Mr. Vedder writes, “it would improve some of the maladies facing it”—rising costs, falling enrollment, low public support—“and possibly even deal with what I now view as the greatest problem: a shocking decline in intellectual diversity and a worsening environment conducive to free expression and civil debate.”