Universities are protesting the Trump administration’s plan to limit the overhead, also known as indirect costs, covered by federal research grants. They argue this change violates a long-standing post-World War II agreement, rooted in Vannevar Bush’s 1945 report “Science, The Endless Frontier.” That agreement was simple: The federal government would fund academic research in the public interest, with the expectation that discoveries would drive economic growth, improve public health, and strengthen national security.
This arrangement, however, assumed universities would prioritize the public interest. In reality, the system has morphed into a bloated, self-serving enterprise that funnels money into university coffers under the guise of advancing research.
Here’s how the system works: When faculty apply for federal research grants, they request funds for essential expenses — such as scientific instruments, computers, and laboratory supplies — known as direct costs. But universities also demand reimbursement for indirect costs, which include administrative support, utilities, and building maintenance. Unlike direct costs, these expenses are not tied to a specific project, yet the federal government allows universities to charge an overhead rate as a percentage of direct costs. At my university, that rate is 52%, meaning that if I apply for $1 million in research funding, I must also request an additional $520,000 for indirect costs. Once the grant is awarded, the university pockets more than half a million dollars — ostensibly to cover overhead.
Originally capped at 8%, overhead rates were increased to 25% before Congress removed the cap entirely in 1965, allowing universities to set their own rates based on internal cost structures. The result? An arms race in overhead charges. Harvard now claims a staggering 69%, while Stanford once charged 78%.
In theory, universities are required to allocate overhead funds toward research-related expenses. In practice, however, these funds often cover a wide range of costs only loosely connected to research — such as libraries, campus security, IT infrastructure, business operations, and legal services. Since money is fungible, every dollar directed toward these “research-related” expenses frees up unrestricted funds for other university priorities.
Supporters of the current system argue that universities use sophisticated methodologies to determine appropriate overhead charges. In reality, the process is riddled with arbitrary allocations, negotiation tactics, and a lack of transparency. Universities employ intricate cost-allocation formulas to justify classifying expenses such as utilities, legal fees, and administrative salaries as research-related. Yet these formulas often rely on rough estimates rather than verifiable data. For example, a university might claim that 40% of its library budget supports research, basing this figure on internal assumptions rather than actual usage statistics. This lack of oversight creates ample opportunity for institutions to manipulate their calculations and maximize their indirect cost recovery.
The negotiation process further exposes the system’s flaws. Universities set their overhead rates through bargaining with a federal agency, typically the Department of Health and Human Services or the Office of Naval Research. But rather than following a standardized formula, this process resembles a strategic bidding game. Universities deliberately inflate their initial claims, knowing they will be negotiated down.
Even more problematic, many indirect costs remain fixed, yet universities charge them as a percentage of direct research spending. Expenses such as building maintenance, utilities, and security do not scale with research expenditures, but universities still levy overhead fees as if they do. Consider a researcher purchasing a $1 million microscope: The university may claim an additional $500,000 in indirect costs, even though the actual increase in overhead expenses is minimal.
Perhaps most indefensibly, all faculty members are subject to the same overhead rate, regardless of their actual indirect costs. As an educational data analyst, my primary research tool is a laptop, meaning my overhead costs are negligible. Yet I pay the same rate as my mechanical engineering colleagues, who must maintain laboratories and expensive equipment. Similarly, mathematicians applying for National Science Foundation grants face the same overhead charges as chemists despite the vast difference in their research expenses. For universities, overhead from faculty such as educational researchers and mathematicians is almost pure profit.
But universities don’t stop at overhead. They also manipulate direct costs, particularly faculty salaries, to extract even more from federal grants. As a professor at a major research university, my assigned workload is typical: 40% research, 40% teaching, and 20% service. I teach four courses per year, which means each course represents 10% of my work time. Yet, through a process known as “course buyouts,” universities have found a way to make the government pay for faculty salaries that universities are already obligated to cover.
Suppose I secure a federal research grant requiring 20% of my time. Instead of allocating half of my designated research time to the project, I request a buyout of two courses, billing the grant for 20% of my salary. At my annual salary of $137,000, each course buyout costs the government $13,700. The university then adds a 32% benefits surcharge, bringing the total to $36,000. In many cases, those bought-out courses are simply not taught, meaning the $36,000 is pure profit. Even when adjuncts are hired, they are paid just $5,000 per course, allowing the university to pocket the remaining $26,000. With a 52% overhead rate, the university tacks on another $19,000, bringing its total windfall to $55,000 — all from my two unnecessary course buyouts. Multiply this across the tens of thousands of faculty receiving federal research grants, and the scale of this moneymaking scheme becomes clear.
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Graduate student tuition is another avenue for financial maneuvering. Universities often grant tuition waivers to Ph.D. students, meaning these students do not pay any tuition. Yet when they work on federally funded research projects, universities charge their full tuition to the grant — even though no actual tuition payment is being made. In other words, the university is billing the government for an expense it has already waived. Given today’s tuition rates, this practice generates a massive windfall, allowing universities to extract tens of thousands of dollars per student from federal funds without providing any additional educational services.
The federal research funding system was meant to support innovation and serve the public good, but universities have transformed it into a lucrative revenue stream. By inflating overhead rates, manipulating cost allocations, and structuring faculty salaries and graduate tuition in ways that maximize their take from federal grants, they have turned taxpayer-funded research into a financial windfall. The Trump administration’s effort to rein in indirect costs is not an attack on research; it is a necessary step toward restoring financial accountability. Universities should prioritize efficient spending and transparency rather than clinging to an outdated system designed to maximize their own profits at the public’s expense.
Stephen Porter is professor of higher education at North Carolina State University.