Amid the deluge of executive orders, budget slashes, and confirmation hearings that has typified the Trump administration’s first 100 days, there’s one pending legislative matter that some college leaders are eyeing with particular anxiety: a possible endowment-tax expansion.
The current tax, enacted by Congress in 2018, skims from the annual investment income of the endowments of a thin and uneven layer of the wealthiest colleges — 56 institutions in 2023, according to the Internal Revenue Service. Broad tax cuts pushed through by President Trump in 2017 are due to sunset this year, and the White House and Republican-controlled Congress plan to extend them. To do that, they need to find ways to pay for the cuts, and expanding the tax on colleges’ investment earnings is likely to be part of their solution — it was included on a list of policy possibilities compiled by Republican members of the House Budget Committee and leaked earlier this year.
Expanding the tax would cost the colleges it applies to more money — possibly a lot more. Legislation has been introduced that would tax colleges’ investment income by 35 percent. The number of colleges it applies to could also grow. College leaders and many experts believe the tax is harmful, cutting into institutions’ ability to provide financial aid and keep costs down, and expanding it would only increase the damage. What is the tax, how might it change, and what might be the consequences?
The Existing Law
The Tax Cuts and Jobs Act altered the federal tax code so that private colleges with endowments that amount to $500,000 or more per full-time equivalent (FTE) student should have their annual investment incomes taxed at a rate of 1.4 percent. Colleges with 500 students or fewer are exempt, as are institutions that educate most of their students outside the United States. Public colleges are specifically exempt — even if they weren’t, the wealthiest public colleges typically enroll tens of thousands of students, which would make meeting the $500,000 threshold unlikely anyway.
The formula that determines which colleges are subject to the tax is complex enough that it isn’t easy to presume the wealthiest colleges all pay it. Harvard and Yale Universities, with their endowments of $53 billion and $41 billion, respectively, pay it. Columbia University, a fellow Ivy League institution with an endowment of nearly $15 billion, does not — it enrolls more than 30,000 students, which would bring its endowment-per-student calculation below $500,000. The IRS protects taxpayer information, so there is no definitive list of institutions that pay the tax.
Why is the federal government taxing college endowments in the first place? Many Republican lawmakers see wealthy colleges as entities with enormous resources which nonetheless saddle their graduates with student-loan debt. According to a statement provided to The Chronicle by David Joyce, a House Republican who represents Northeast Ohio and has introduced legislation to expand endowment taxes, “it is past time to hold these institutions accountable.”
It is past time to hold these institutions accountable.
But lawmakers misunderstand what endowments are and how they work, says Steven Bloom, assistant vice president for government relations at the American Council on Education, known as ACE. “They think, Oh, it’s a rainy-day fund that can be used for anything,” he says, “which isn’t true.” Endowments typically consist of hundreds or thousands of specific tranches of dollars earmarked by their donors for very specific purposes, such as financial aid for lower-income students or medical research. Each year, colleges typically draw up to 5 percent of the endowment’s total value from that year’s investment returns to supplement their operating revenues. Last year, colleges used about half of their annual endowment draw on average for financial aid to students, according to an annual survey conducted by the National Association of College and University Business Officers and the Commonfund Institute.
So, a tax designed to spur colleges to lower costs could be doing the opposite, Bloom says. During a meeting Bloom once had with staff members from the House’s Ways and Means Committee, which oversees tax policy, they said that the tax was designed to “reward the good actors,” Bloom says. “Well, what’s a good actor? Those are the people that are devoting enormous financial resources to student-aid packages. What are the schools that are doing that? They’re the schools with the largest endowments.”
Possible Changes
Lawmakers could adjust the endowment tax in several ways and degrees. The simplest might be to increase the rate at which colleges’ investment income is taxed. The list of Republican policy possibilities leaked earlier this year noted that boosting the tax rate to 14 percent, a tenfold increase over the current rate, would bring in an additional $10 billion in revenue over 10 years. Joyce’s bill reintroduced last year, proposes raising the rate to 10 percent and with a subsequent increase to 20 percent for colleges that raise their net price of attendance above the rate of inflation over three years. Some lawmakers would like the rate to go even higher, says Brian Flahaven, vice president for strategic partnerships at the Council for Advancement and Support of Education, known as CASE: “I have heard some scuttlebutt around, ‘Maybe they should be taxed at 21 percent,’ which is the corporate tax rate.” Vice President JD Vance introduced a bill when he was in the Senate in 2023 that would raise the rate for institutions with endowments of $10 billion or more to 35 percent.
Lawmakers could also expand the tax by altering the formula that determines which colleges are subject to it. Joyce’s bill, for example, would lower the threshold for endowment-per-FTE-student calculations from $500,000 per student to $250,000, which would rope a much larger set of institutions into the tax. For example, Furman University, a private institution in Greenville, S.C., has an endowment of about $850 million and enrolled 2,510 FTE students in the fall of 2024. With an endowment-per-FTE number of about $339,000, it is not currently subject to the tax but could be if a proposal like Joyce’s went through.
The leaked policy document also raised the possibility of excluding international students from the endowment-per-FTE calculation, a provision it projected would bring in an additional $275 million in tax revenues over 10 years. Flahaven believes that lawmakers are considering the tactic to encourage colleges to enroll more American citizens. The more American students a college has, “the chance that you’re within the threshold of the endowment tax goes down,” he says, “because obviously your denominator goes up.”
What’s a good actor? Those are the people that are devoting enormous financial resources to student-aid packages. ... They’re the schools with the largest endowments.
Elizabeth Davis, president of Furman, is concerned about the prospect of her institution becoming subject to the tax. Furman drew $30.7 million from its endowment in fiscal year 2025, and $17.6 million — 48 percent — went to student financial aid. Another $7.7 million was spent on academic programs and libraries, $4.3 million for facilities, and $4.1 million for professorships. Only $3.4 million was unrestricted, to be used at the leadership’s discretion. Since most monetary gifts to colleges are restricted to a specific use, Davis says, “there’s really little wiggle room with how we can use the endowment.”
If Furman became subject to the tax as it is currently, the university could bear it. Taxing the university’s annual investment income at the current 1.4-percent rate would come out to about $500,000 a year. But if the rate climbed to a double-digit percentage and “you get into the multimillions, we’re going to have values that conflict,” Davis says. Would Furman preserve the benefits to students that its budget currently allows, such as small classes and stipends for internships, or would it be forced to become less accessible to students of modest means by offering less financial aid?
What Happens Next?
Congress is in the midst of the budgeting process right now, but it may be months before a final proposal about expanding the endowment tax appears. “It always takes more time than anybody thinks,” says Flahaven, of CASE. Even with both chambers of Congress under Republican control, the House version of any bill will have to be reconciled with the Senate version of the same legislation, which can be a long and complicated process. “It’s going to take them most of this year,” he adds. “Maybe they’ll get it done before the August recess period.”
By the time the final bill appears, experts say, it will probably be missing the most extreme proposals. While many House Republicans are eager to hike the endowment tax, the Senate is likely to take a more circumspect view of the issue — Bloom, of ACE, doubts that Republican senators have “the appetite to make significant changes to the endowment tax” and will push out most of the drastic shifts. For example, the House version of the 2017 legislation set the endowment-per-FTE threshold at $100,000, but it was increased fivefold in the Senate before the law was sent to President Trump to sign. As Flahaven puts it, “they always say the Senate is the saucer where everything cools.”
