In 2025, US universities facing substantial research funding cuts must respond strategically rather than simply cutting costs.
The status quo ante. The previous Biden Administration’s budget proposal for FY2025 proposed $201.9 billion in federal funding for research and development, an increase of $7.4 billion above the FY2024 estimated level of $194.6 billion. Under this budget proposal, the following 6 federal agencies would receive nearly 95% of total federal R&D funding— (1) Department of Defense, (2) Department of Health and Human Services, (3) the Department of Energy, (4) the National Aeronautics and Space Administration, (5) National Science Foundation, and (6) U.S. Department of Agriculture; 70% ($141 billion) of the proposed funding was for the Department of Defense (46% - $92 billion ) and the Department of Health and Human Services (25% - $50.4 billion) combined. Federal Research and Development (R&D) Funding: FY2025.
The new Trump administration has announced and signaled a substantial shift in these priorities.
The National Institutes of Health (NIH) is the primary research grant-making body within the Department of Health and Human Services. It funded $36.9 billion to researchers in 2024. On February 7th, 2025, NIH announced it was capping indirect cost reimbursements at 15%, down from the current 40-70% range. NIH Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Cost Rates. Economist Bjorn Markeson estimates the impact of this change would be an annual $5.5 billion reduction in annual research funding, a $6.1 billion decrease in US GDP, a $4.6 billion reduction in labor income and risk 46,000 US jobs. Understanding the Economic Implications of NIH’s Indirect Costs Cap: A Closer Look at the 2025 Proposal. In addition, the issuance of new research grants has been halted for the past month - Duke University's NIH grant and contract award notices have dropped from 166 in January and February of 2024 to just 64 so far in 2025. March 7th, 2025, Associated Press.
The U.S. Department of Defense (DOD) on March 7th, 2025 ended all of its funding for social science research, stopping 91 ongoing studies related to threats such as climate change, extremism, and disinformation. 2025, March 7th Pentagon Press Release.
The US Department of Education on February 14th, 2025 warned universities it would withdraw funding to universities that maintained Diversity, Equity and Inclusion (DEI) programs (2025 February 14th, United States Department of Education Office For Civil Rights Letter). On March 7th, 2025 the Trump administration announced it was cutting $400 million in grants and contracts to Columbia University, in response to claims of an inadequate response to antisemitism on campus. 2025 March 7th, Associated Press. A week later the Department announced it was investigating over 50 colleges and universities with respect to DEI initiatives. March 14th, 2025 The Hill Report.
The potential raising of the endowment tax represents another financial challenge for universities, impacting their capacity to support research initiatives. Two bills have been introduced in Congress this year to raise the tax on endowments. The Endowment Tax Fairness Act (H.R. 446) introduced by Rep. Troy Nehls (R-TX) on January 15, 2025 proposed to raise the tax from from the current 1.4% to 21%. How much this will increase taxes on relevant universities depends on the future returns on their endowments. Assuming a 7.5% average annual return, The Tax Foundation estimates it will cost an additional $69.8 billion over 10 years, and assuming a 10% average annual return it would raise $112.3 billion over the same period. January 28th, 2025 Tax Foundation. Potential changes to endowment taxes will compound existing funding pressures.
Universities are already feeling the substantial impact of these cuts. University of Pennsylvania Interim President, J. Larry Jameson wrote that the change to the NIH overhead policy alone would reduce Penn's annual federal funding by approximately $240 million. February 11th, 2025 University of Pennsylvania Statement. At Duke University, which received $580 million in NIH funding last fiscal year, the proposed change could cause an annual reduction of $194 million. February 28th, 2025 Duke University Statement. The University of Louisville reported an expected loss of $20 to $23 million in NIH funding due to the change in policy. February 25th, 2025, Louisville News.
In response, universities across the country have taken preemptive and reactive cost-cutting measures to cut costs, such as hiring freezes and personnel reductions, e.g. at Duke University, University of Washington, University of Pennsylvania and North Carolina State University, Harvard University, Stanford. Johns Hopkins University, which is the largest university recipient of federal research funding and specialized in USAID-funded research projects, announced on March 13th, 2025 it was laying off 2,200 employees, the largest in its history, due to USAID funding cuts. 2025 March 13th. USA Today. Other universities have also introduced tiered furloughs, limits on travel, raises, overtime, and non-essential spending, as well as encouraging virtual meetings to reduce catering costs, reduced non-personnel expense budgets and increasing pre-approval requirements e.g. Northwestern, Western Illinois University.
While cost-cutting is a necessary and reasonable initial response, a more profound strategic shift is required by both the scale and nature of these funding cuts. Cost-cutting is a tactic not a strategy. When confused with strategy, cost-cutting at best distracts from the imperative to identify and pursue new growth opportunities, at worst it can tip the university into a death-spiral of offering less and less of what the market wants at perpetually declining prices, under the guise of prudent parsimony.
Arizona State University (ASU) serves as a prime example of a university that successfully transformed itself through strategy amidst a literal and figurative desert of resources. ASU first sagely reflected on what made it unique - its desert location and consequently focused on solar energy and water sustainability. The university built expertise in these areas that would later become globally significant. ASU aggressively pursued partnerships with corporations like General Electric and Motorola, which were expanding operations in Phoenix and structured deals where corporations funded labs/faculty in exchange for first-access to graduates—a proto-cooperative education model. ASU built water sustainability research hubs decades before climate change became a funding priority. For the past 10 years, Arizona State University has been ranked No. 1 in innovation by U.S. News & World Report. 2024 September 23, Arizona State University. Between 2002 and 2024, under the stellar leadership of President Michael Crow, ASU increased the scale and scope of its research activity more than sevenfold in research expenditures terms, from $123 million to $904 million. ASU News, November 27, 2024.
UC Berkeley's response to financial challenges between 2008 and 2012 demonstrates the power of strategic partnerships and focused investment. Between 2008 and 2012, the University of California (UC) system, including UC Berkeley, experienced significant reductions in state funding due to the financial crisis. In the 2009-10 academic year, the UC system faced an $813 million cut, with UC Berkeley's share nearly $150 million. 2010 May 11th UC Berkeley News. Rather than cost-cutting all departments equally, Berkeley (a) doubled down on interdisciplinary clusters, such as nanotechnology and the gene-editing; (b) again it leveraged its unique location to create the "Berkeley Gateway" partnership with Lawrence Livermore Lab, securing DOD/DOE grants that were inaccessible to private peers and (c) raised $3.13 billion from more than 281,000 donors between 2008 and 2014. February 27, 2014 Berkeley News.
Seizing the strategic opportunity inherent in periods of resource constraint can create, or recreate a strong and thriving research function because scarcity (1) forces prioritization; (2) creates a catalyst for innovation; (3) strengthens organizational identity (4) stress-tests systems and (5) accelerates organizational learning. As Marcus Aurelius observed when simultaneously facing both a plague and an invasion in the second century, “The impediment to action advances action. What stands in the way becomes the way."
Patrick Landers is VP of Strategy at Convene Lab, a strategy consultancy focused on strategic practice. Click here for a quick chat.