Private colleges across the United States are facing a growing threat to their financial stability as Congressional Republicans propose significant changes to the taxation of endowments. Initially introduced in 2017 as part of former President Donald Trump’s sweeping tax reforms, the 1.4% tax on the net investment income of college endowments could soon be dramatically increased and extended to encompass a larger number of institutions. The implications of these changes are far-reaching, with 127 schools potentially falling under the expanded tax criteria.
The Origins of Endowment Taxation
The endowment tax was first established in 2017 to help offset the cost of the Trump Administration’s tax cuts. It applies to private colleges with more than 500 paying students and endowment assets exceeding $500,000 per student. According to the Internal Revenue Service, 56 schools paid $381 million in endowment taxes in 2023, although the IRS does not publicly disclose the names of these institutions. However, Department of Education data indicates that 41 schools, including Harvard University, were subject to the tax based on their endowment values as of mid-2023.
For schools like Harvard, which boasts the nation’s largest endowment at $53 billion, the current tax burden is manageable. Harvard reported paying $44 million in “taxes and other fees” for fiscal year 2024. However, new proposals could escalate these costs significantly.
Proposals to Raise and Broaden the Tax
Congressional Republicans have floated a variety of measures to increase endowment taxes. Suggestions include raising the tax rate from 1.4% to as much as 21%, equivalent to the corporate tax rate. Vice President J.D. Vance has proposed a 35% tax on the investment income of endowments exceeding $10 billion. Additionally, Senator Tom Cotton has introduced the Woke Endowment Security Tax Act, which would impose a one-time 6% tax on the total endowment assets of 11 wealthy universities, raising an estimated $16.6 billion.
Lowering the per-student endowment threshold is another possibility. For instance, a proposal by Representative Mike Lawler would reduce the cutoff to $200,000 per student, which, when combined with other changes such as excluding foreign students from the calculation, could expand the tax’s reach to 127 colleges. This expansion disproportionately targets private institutions in Democratic-leaning states but also risks affecting schools in Republican-leaning areas.
Implications for Colleges and Students
While proponents of the expanded tax argue that wealthy colleges should contribute more, opponents warn of dire consequences. Endowment income is a critical source of funding for financial aid, research, and other educational programs. Schools typically spend only a fraction of their endowment earnings to ensure long-term stability, especially given the volatility of financial markets.
Elizabeth H. Bradley, president of Vassar College, highlighted the financial strain this tax imposes. “We give $80 million a year in financial aid,” Bradley stated. “Taxing that is really very, very distressing for us.” Vassar recently became subject to the tax after its per-student endowment exceeded $500,000.
Moreover, a survey by the National Association of College and University Business Officers revealed that endowments collectively earned an 11% return in fiscal 2024 but allocated only $30 billion—or 48% of these funds—to student scholarships. Critics argue that increasing the tax could reduce scholarships and make higher education less affordable for low- and middle-income students.
Political and Public Perceptions
The debate over endowment taxation reflects a broader political and cultural divide. Public confidence in higher education has plummeted, with Gallup reporting that only 36% of Americans expressed “a great deal” or “quite a lot” of confidence in colleges in 2024, compared to 57% in 2015. Republican dissatisfaction with “woke” policies and perceived mismanagement by elite institutions has intensified calls for reform.
Representative Vern Buchanan’s Protecting American Students Act exemplifies this sentiment. The bill proposes excluding foreign students and undocumented immigrants from the per-student endowment calculation. “Enroll more American students or pay the price,” Buchanan declared in a statement, criticizing elite colleges for their handling of campus protests and diversity issues.
A Complex Financial and Policy Landscape
The uncertainty surrounding endowment taxation has prompted schools to reevaluate their financial strategies. Some institutions may shift their investment portfolios toward riskier, illiquid assets to minimize taxable income, while others are considering more liquid portfolios to prepare for potential revenue losses. Tim Yates, CEO of Commonfund OCIO, noted that colleges are approaching these decisions cautiously, given the unpredictable nature of future tax changes and federal funding cuts.
As lawmakers debate these proposals, the higher education community faces an uphill battle to protect its financial autonomy and maintain its public mission. The outcome of these deliberations could reshape the landscape of American higher education, with significant implications for students, faculty, and the broader society.
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