Proposed College Endowment Tax Hike: What to Know

The debate over college endowment taxes is heating up as lawmakers consider a major increase that could reshape higher education funding. Currently, only a handful of wealthy private universities pay a 1.4% tax on their endowment investment income, a policy introduced in 2017. 

However, a new proposal aims to raise that tax rate to 14%, significantly increasing the federal government’s revenue while placing a larger financial burden on institutions with substantial endowments. The proposal could also expand the number of colleges subject to the tax, affecting more schools and their financial strategies.

Supporters argue that elite universities should contribute more, particularly as their massive endowments continue to grow. Critics warn that higher taxes could limit scholarship opportunities, cut research funding, and impact long-term institutional planning. 

With billions of dollars at stake, students, faculty, and university administrators are closely watching how this proposed tax hike could change the financial landscape of higher education.

How Taxes On College Endowments Work

Most colleges and universities operate as tax-exempt nonprofit institutions, meaning they do not pay taxes on donations or investment earnings. Endowments—financial assets built from donations and investments—generate income that supports various institutional priorities, including scholarships, faculty salaries, and facility maintenance.

In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which imposed a 1.4% excise tax on the net investment income of private colleges and universities that enroll at least 500 students and have endowment assets exceeding $500,000 per student.

This tax affects a relatively small number of institutions—58 as of 2022—and generated $244 million in revenue that year. The threshold for taxation is not indexed for inflation, meaning more schools could become subject to the tax over time.

Largest College Endowments

For context, the 10 largest college endowments in the United States have a combined $262 billion in assets. Its these large numbers that have higher education critics asking, “why should the government be providing assistance to students of these colleges when these schools have so much money they’re not using for students?”.

Here’s what colleges currently have the largest endowments:

However, it’s important to note that endowment funds can be “restricted” or “unrestricted”. Restricted funds are earmarked for a specific program – like a dedicated scholarship or funding a specific “chair”. These funds can’t simply be used for anything besides their restricted purpose.

Using Harvard as an example, Harvard reports that 70% of their endowment is restricted or committed to certain programs. However, that would still leave 30% unrestricted (which equates to almost $16B – making it still one of the top 10 largest endowments). And according to the common data set, roughly 15-16% of their undergraduate students are receiving Federal funds via Pell Grants and subsidized loans for the past several years.

While it’s a relatively little amount of aid dollars: should they receive anything given they have so much money? 

Proposed Changes

Lawmakers are now considering an increase in the endowment tax rate from 1.4% to 14%, which would significantly raise federal revenue, bringing in an estimated $2.2 billion per year. The proposal also suggests expanding the number of institutions subject to the tax, potentially adding 10 to 12 more colleges initially. This expansion would yield an additional $27.5 million in tax revenue annually.

Supporters of the tax argue that wealthy universities should be required to contribute more, particularly if their large endowments are not directly benefiting students through lower tuition or increased financial aid.

Critics, however, warn that such policies could discourage charitable contributions and reduce long-term investment in higher education.

Potential Impact On Colleges And Students

If enacted, the proposed tax increase could have several consequences:

1. Financial Aid and Tuition Costs: Some universities with large endowments use investment income to offset tuition costs, especially for low-income students. Higher taxes could reduce available funds for scholarships and tuition assistance, potentially making college less affordable for some students.
2. Research and Faculty Hiring: Many elite institutions allocate a portion of their endowment income toward research grants and faculty salaries. A higher tax burden might force universities to scale back research initiatives, limiting advancements in science, technology, and medicine.
3. Long-Term Financial Planning: Universities rely on endowments to maintain financial stability through economic downturns. Increasing the tax on investment income could make institutions more cautious about their spending, affecting everything from student services to infrastructure improvements.

Supporters of the proposals say some of these challenges are overblown because if colleges actually used their wealth to reduce tuition costs or higher more faculty, they’d be subject to less taxes as a result.

What’s Next?

The idea of taxing university endowments has sparked debate among policymakers, university administrators, and donors. Some lawmakers argue that elite universities should use more of their financial resources to support students directly, while others caution against measures that could undermine institutions’ ability to invest in long-term educational priorities.

The proposed tax changes are still just proposals, and it remains unclear whether they will gain enough support to pass. If implemented, these changes could reshape how universities manage their endowments and allocate financial resources.

Don’t Miss These Other Stories: