How Trump Could Devastate Our Top Colleges’ Finances

Elite research universities in the United States often lead in international rankings. Our top liberal-arts colleges have few overseas competitors. Students around the world seek admission here, with particularly strong demand for those institutions at the top of the selectivity ladder. Yet the strength of our best colleges is at risk — the prospect of steep taxes on their endowments looms, and may soon threaten their standing.

A handful of American colleges hold tremendous wealth. Indeed, Harvard University’s endowment of $50 billion is larger than the GDP of many countries, and Princeton University’s endowment totals $4 million per enrolled student. These assets generate large investment returns that provide extensive operational support, enabling these institutions to offer outstanding educational opportunities to the students who attend them. Traditionally, those investment returns have been received tax free.

But change is in the air. Over perhaps the past decade, higher education has become increasingly politicized, and Republicans in particular have lost faith in the sector. With President-elect Donald J. Trump’s second term looming, attacks on college finances are likely. We may see reductions in research funding, federal financial aid, and access to international students — measures that could imperil some institutions but are unlikely to fundamentally damage our best-resourced colleges. What might do so is tax policy.

Historically, nonprofit organizations have been exempt from endowment taxation if they provide significant social benefits. Highly endowed colleges satisfy this condition, thanks to their innovation, entrepreneurship, and leadership. Research conducted at these institutions offers considerable public value, and roughly half of endowment spending goes to support for financial aid.

Yet in 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law, which included an endowment tax. Institutions with more than 500 students and endowments greater than $500,000 per student are now required to pay a 1.4-percent tax on their net investment returns.

In 2023, 56 colleges paid this tax, raising $380 million in revenue. These figures represent less than 0.01 percent of the $6.1-trillion federal budget that year and less than 1 percent of the budgets of these institutions. The tax is small enough that it does not fundamentally alter the finances of these institutions.

But that may change in the upcoming Trump administration. Last year Vice President-elect JD Vance, then senator of Ohio, introduced a bill to increase the endowment tax to 35 percent. President Trump has not specifically endorsed it, but he has supported the notion of increasing the endowment tax.

It would be easy to do. The endowment tax is hardly the central focus of the TCJA, which almost certainly will be extended this year. All that is needed is a little white-out to replace the 1.4-percent tax rate with a 35-percent tax rate to make the change. The bill’s final passage will not depend on this provision.

The impact of such an increase would be devastating to these institutions. Increasing the tax rate to 35 percent would result in tax payments constituting 23 percent of affected colleges’ annual budgets in a year with typical endowment returns. Such enormous annual payments would drain their endowments over time and result in massive cuts in their operating budgets. The enormous financial hit would deteriorate the educational opportunities they offer. Yet the tax collected would still only reflect 0.13 percent of the federal budget.

Is it wise to impose such harsh sanctions on highly endowed institutions? Endowment-tax supporters claim that the benefits our richest colleges offer students accrue largely to those from higher-income families, reinforcing social stratification. Historically, they have had a point: These institutions enrolled few lower-income students, something that changed little throughout the 20th century.

More recently, though, progress has been made. These institutions offer net prices, after accounting for financial aid, to lower-income students that are lower than those charged by less well-endowed private institutions and even public flagship institutions. Several, including Dartmouth College, Vanderbilt University, and the University of Pennsylvania (all of whom are subject to the endowment tax), have recently instituted free-tuition policies even for middle-income students. My calculations from data reported to the U.S. Education Department’s Integrated Postsecondary Education Data System indicate that the percentage of freshmen receiving Pell Grants at endowment-tax-affected colleges increased 20 percent between 2015-16 and 2022-23. When these students attend an elite institution, they typically achieve high rates of social mobility.

Ironically, a large endowment tax likely works against the goal of access. How would institutions respond to the financial hit? College budgets are full of fixed expenses. Extensive infrastructure needs to be maintained. Existing programs with staffing and funding commitments are difficult to eliminate. What is the easiest way to improve the bottom line? Reduce financial aid and enroll fewer lower-income students.

Other proposed legislation piggybacks off the current endowment tax and would restrict student access to federal student loans if they attend an endowment-tax-paying institution. Such an approach paired with an increase in the endowment tax would represent a double whammy on the goal of improving college access.

We need to focus on the goals we are trying to achieve when we institute a tax. An exorbitant endowment tax on highly endowed institutions will limit the benefits they offer to society and to the students who enroll. This would harm the standing of these institutions on the international spectrum. It would also harm the goal of providing greater access, which should be encouraged. It is a tax policy that we should avoid.