'Cutting Their Own Future': What Raising the Endowment Tax Means for Universities

During President Donald Trump's second term, the federal government's main financial impact on higher education has been through cuts in funding to institutions and the sector as a whole. However, more financial pressure may come in the form of money flowing out. Trump and congressional Republicans have proposed plans requiring colleges to pay the government, including significantly expanding taxes on college endowments.

If such proposals are passed, these taxes would fundamentally change the relationship between the government and many nonprofit colleges, as well as how these institutions interact with their donors. More importantly, from an operational perspective, such taxes could deal a heavy blow to current students, research programs, and the daily operations of colleges.

"We just think this would divert resources away from the core mission of institutions," said Liz Clark, vice president for policy and research at the National Association of College and University Business Officers (NACUBO), regarding the endowment tax.

An 'attack' on colleges' tax-exempt status

In 2017, during Trump's first term, the Republican-controlled Congress passed the first excise tax on college endowments. The tax rate was 1.4%, applied to colleges with 500 or more tuition-paying students and endowments of at least $500,000 per student.

The scope of this tax was relatively limited—Tim Yates, president and CEO of Commonfund OCIO, noted that roughly 50 to 55 institutions were affected. Commonfund OCIO is an organization providing investment management services to nonprofits. These few dozen institutions are among the wealthiest colleges in the United States. For example, Harvard University, whose endowment is the largest in the nation and often a target for supporters of the endowment tax, paid approximately $44 million in taxes and other fees in fiscal year 2024.

"The reality is that in 2017, when the 1.4% rate was being discussed, institutions were somewhat relatively prepared," said George Suttles, executive director of the Commonfund Institute. "There was communication within the higher education community about 'How do we absorb this impact? How do we communicate this to donors and other stakeholders?'"

The industry may have been prepared, but that doesn't mean it was satisfied with the tax. The then-head of NACUBO called it at the time "an unprecedented and destructive attack on the tax-exempt status of institutions." NACUBO still opposes any form of endowment tax today.

Recently, some Republicans are pushing to significantly raise this tax rate, and they may include it in Congress's upcoming budget reconciliation process. Budget reconciliation bills require only a simple majority in the Senate, bypassing the filibuster hurdle that needs 60 votes to overcome.

"It's simple math. You either have to earn more or spend less."

—Tim Yates, President and CEO of Commonfund OCIO

A leaked House policy priorities list in January included the possibility of raising the endowment tax rate to 14%, while maintaining the $500,000 per student threshold parameter. The document estimated that this change would raise $10 billion in revenue over 10 years.

Other proposals advocate pushing the rate even higher. A bill introduced in January by Republican Representative Troy Nehls of Texas would raise the rate to 21%—the same rate paid by for-profit corporations.

"Elite private universities accumulate and hoard massive endowments while paying less than 2% tax on their investment income, far below the rates most hardworking Americans pay," Nehls said in a statement, adding that these institutions' "tuition increases for American youth" have exceeded average inflation.

At least one proposal seeks to lower the endowment threshold per student by more than half, to $200,000 per student, which would force more colleges to pay the tax. Current Vice President JD Vance, while serving as a senator, introduced a bill in 2023 proposing a higher tax—35%—on endowments valued at over $10 billion.

Jason Delisle, a senior nonresident fellow at the Urban Institute, noted during a February panel discussion at the American Council on Education that if lawmakers loosen the tax threshold, many institutions far less well-known than schools like Harvard could also be brought into the tax net. "If you expand this tax, a lot of smaller private liberal arts colleges would be affected because they are small," Delisle said. He previously served as a resident fellow at the conservative American Enterprise Institute.

A higher tax on investment returns could prompt endowments to adopt more aggressive strategies to offset the tax burden. "It's simple math. You either have to earn more or spend less, and the only way to earn more is to increase risk exposure in some way," Yates said. He mentioned a range of possibilities, such as putting more money into stocks or investing in fixed-income instruments (like bonds) with higher credit (and therefore default) risk. "It's called risk for a reason," he added. "With risk comes potential volatility. Investment committees need to do a lot of thinking."

'The value of what endowments do'

A greater concern for industry observers is that raising the endowment tax would strip value from the funds, ultimately dragging down the functions they support. "In our view, it's very important to continue protecting the value of what endowments do for higher education," Yates said. "We have to remember that even without taxes, the work endowments need to accomplish is already quite challenging."

This work includes spending to support current operations while staying ahead of inflation—which in higher education is typically more severe than in the broader economy—to support future generations. "You're cutting into your own future and potentially reducing available funds year by year, rather than giving institutions confidence that they have a stable, reliable source of funding," Clark said.

Each year, NACUBO and Commonfund study the value of endowments and their role on college campuses. Their latest research found that nearly half of endowment spending—48.1%—goes to student financial aid. Some of America's top institutions rely on endowment spending to heavily subsidize tuition for low-income students in the form of institutional grants.

Other research shows that institutional aid provided by colleges overall is increasingly important. In a 2024 study, the College Board found that, adjusted for inflation, institutional grants to students grew by nearly $20 billion over a decade. By the 2023-24 academic year, institutional grants reached $82.8 billion, accounting for 52% of all grant aid, up from 41% in 2013-14. "Everyone wants college to be more affordable," Yates said. "Endowments are working toward that."

Beyond student aid, according to the NACUBO-Commonfund study, colleges also allocate 17.7% of endowment spending to academic programs and research, and 10.8% to endowed professorships. For NACUBO, the endowment tax represents "resources that could have been used for teaching, research, and public service faculty at colleges," Clark said. "Our preference is for Congress to seize the opportunity to roll back this tax."

As Moody's analysts explained in a recent report, a higher or expanded endowment tax could force many colleges to "reassess their endowment payout policies, fundraising approaches, and asset allocation strategies to maintain the purchasing power of their endowments." They added that some institutions, facing reduced investment income, might have to cut student financial aid or other expenditures.

College-donor relationships 'weakened'?

Observers also warn that raising the endowment tax could disrupt fundraising by weakening the impact of donations on colleges. "These funds represent the intentions of donors who trust institutions to use their contributions for scholarships or to support specific academic fields," Clark said. "It's regrettable that Congress wants to weaken this relationship between donors and institutions." When asked whether a higher tax would deter donations to colleges, Clark said: "Donors may seek more effective ways to channel their charitable contributions."

Suttles noted concerns that the tax would dilute the impact of donors' contributions to colleges, thereby discouraging giving. "What we're hearing from peers in the higher education philanthropy space is that this would have real effects," he said. "When the ability of endowments to grow in value is subject to additional constraints, you can't negotiate with donors and optimize impact." Suttles added: "When you consider the regulatory environment, and how donor intent has traditionally been respected, what is the impact of a tax like this potentially harming that sacred trust between donors and institutions?"