Institutions of higher education (IHEs) and affiliated medical centers and research centers are aware of the significant policy shifts affecting National Institutes of Health (NIH) funding since January 2025. This client alert examines the legal, operational, and strategic impacts of the 15% indirect cost reimbursement cap and the freeze on grant and contract processing at the NIH. Specific examples of enforcement, institutional responses, and pending legal challenges illustrate how these changes are unfolding in practice and the risks institutions face.

NIH’s Indirect Cost Cap

On February 7, 2025, the NIH issued Supplemental Guidance NOT-OD-25-068, which imposes a cap of 15% on indirect cost rates for all grant awards. This measure replaces institution-specific negotiated rates that, in many cases, exceeded 50%. The proposed 15% indirect cost cap has not only caught many institutions off guard but also immediately strained their finances. Institutions rely on these reimbursements to support research infrastructure and administration and may need to reallocate institutional funds or seek private funding to fill the gap.

Legal challenges have followed swiftly. A coalition of 22 states filed suit against the federal government in Commonwealth of Massachusetts v. National Institutes of Health , No. 1:25-cv-10338 (D. Mass. filed Feb. 10, 2025), arguing that the NIH’s abrupt imposition of a uniform cap constitutes a substantive rule change requiring formal rulemaking under 5 U.S.C. § 553, and that the policy change is arbitrary and capricious under 5 U.S.C. § 706(2)(A), lacking a rational basis or sufficient explanation. Two related lawsuits are Association of American Universities v. National Institutes of Health (D. Mass.) and Association of American Medical Colleges v. National Institutes of Health (D. Mass.). In response, the federal district court in Massachusetts issued a nationwide preliminary injunction on March 10, 2025, halting enforcement of the cap. The court's ruling emphasized the potential for irreparable harm to research institutions.

However, final adjudication of these cases may either reinstate or permanently vacate the indirect cost cap. Given this uncertainty, colleges and universities have reacted by restricting incoming Ph.D. admissions, implementing hiring freezes, and larger capital projects centered on their research enterprises.

Grant Funding Freezes at the NIH

On January 27, 2025, the Office of Management & Budget (OMB) issued a memorandum directing federal agencies, including the NIH, to pause funding. As a result of two federal court cases, National Council of Nonprofits et al. v. Office of Management & Budget et al. (D.D.C.) and State of New York et al. v. Donald J. Trump et al. (D.R.I.), the funding freeze was enjoined.

Yet, issues have persisted at the NIH where scheduled NIH study sections for grants were paused and NIH advisory councils have not convened, leading delays in the timely review and processing of new grant applications and renewals.

Funding freezes and delays have created significant uncertainty in vital research areas, including oncology, neurodegenerative diseases, and public health initiatives. These disruptions not only affect current research but also threaten the pipeline of future scientific innovation and talent development, as incoming Ph.D. admissions may be restricted, faculty members may see funding for research dry up, and principal investigators may lack the funds to hire research assistants in their labs.

Restricting Funding as an Enforcement Mechanism

Certain institutions have expressed concern that the administration is using funding cuts to circumvent processes under Title VI or Title IX, citing concerns related to alleged race/ethnicity or gender-based discrimination.

We anticipate that institutions may challenge such enforcement efforts as exceeding statutory authority under the enabling legislation for federal agencies, such as the NIH, as well as exceeding statutory authority under the civil rights laws. Constitutional claims may also arise under the Spending Clause, arguing that the federal government cannot impose new conditions on previously awarded funds.

Strategic Considerations for Higher Education

In light of these developments, IHEs should proactively manage the risks associated with NIH funding changes, including:

• Reviewing current NIH grant and contracts and internal compliance policies to identify vulnerabilities.
• Planning for potential budget shortfalls within the research enterprise, identifying alternative funding sources, and reallocating institutional resources as needed.
• Closely following ongoing litigation concerning the indirect cost cap and funding freezes to inform compliance and financial planning.
• Collaborating with peer institutions, higher education associations, and legal counsel to support coordinated advocacy and collaborative solutions.
• Evaluating internal decision-making processes to ensure preparedness for potential federal inquiries, enforcement actions, or policy shifts.

Conclusion

Colleges and universities and their affiliated medical centers and research centers face an evolving NIH funding environment. While court orders have temporarily halted some measures, the broader shift in federal research funding has significant implications for research continuity, institutional budgets, and academic autonomy.