How Republicans’ Endowment Tax Will Hurt Higher Education

When President Trump first signed a bill in 2017 eliminating the tax-exempt status many private university endowments enjoyed, Rep. Kevin Brady—the key congressional Republican overseeing the tax code rewrite as chairman of the powerful Ways and Means Committee—said the goal of the new tax was “pretty simple: It encourages colleges to use their major endowments to lower the cost of education.”

In the face of a further tax increase on a small subset of private colleges in the United States, the GOP’s rationale has shifted. Brady’s successor, Rep. Jason Smith, has pitched the increased levies as a way to hold “elite, woke universities and nonprofits accountable.”

Tucked inside Republicans’ 800-plus page “One Big Beautiful Bill” is a provision raising the tax on earnings from select private college endowments from its current 1.4 percent rate to anywhere from 4 to 8 percent. The levy is calculated by dividing the size of the school’s endowment by the number of non-international students they enroll, outputting a number representing the amount of money held in the endowment per student. The higher the per-pupil endowment rate, the higher the tax. This creates an incentive structure, Republicans argue, that encourages colleges to spend more of its endowment on financial aid and the students’ learning experience, rather than hoarding its wealth into what are effectively hedge funds. But higher education experts dispute this, asserting that endowments serve to lower the cost of the education.

In a survey of 645 U.S. institutions by the National Association of College and University Business Officers, financial aid accounted for nearly half of all endowment spending. Academic programs and research accounted for another 17 percent and faculty positions for nearly 11 percent. “Faculty and staff certainly benefit from this philanthropy, but students remain the primary beneficiaries, as the bulk of these resources is used to maintain student aid and affordability,” NACUBO President and CEO Kara Freeman said.

Increasing the tax burden for these colleges could divert funds from these programs, negatively impacting access to education, Phillip Levine, a senior nonresident fellow at the Brookings Institution and an economics professor at Wellesley College, told The Nation. “These highly endowed colleges are the least expensive college options for students below perhaps $150,000 in income per year,” he said. “They are able to do that because of their large endowments.”

Another GOP qualm, in the words of Smith, is that colleges have used their multibillion dollar slush funds to push political ideology. “That ends now. If these institutions want to act like corporations, we’ll treat them like corporations.”

Endowments, however, have strict rules governing them. The amount of money that can be pulled from them annually is regulated by state laws. Donors also stipulate how their money can be used. Some donate to endow professorships. Others donate to increase student financial aid, fund construction of a building, or fund research.

Existing in a largely tax-exempt world since the early 1900s, higher education institutions have enjoyed a federal tax carveout due to their mission and contribution to civil society. “Higher education absolutely has a civic responsibility,” Director of Post-Secondary Policy at Education Reform Now James Murphy said in an interview, citing its ability to provide social mobility to its students and advance scientific inquiry.

Steven Bloom, assistant vice president of government relations for the American Council on Education, went as far as to call American higher education “a national security asset.” “They are a magnet for the world’s brightest students and scholars,” he argued. 

In a 2019 paper Mae C. Quinn, a law professor at Penn State, argued that colleges could simply use the funds in the endowments in ways that make higher education more equitable, such as on financial aid. Spending down these endowments would exempt them from a tax while simultaneously benefiting disadvantaged groups who are under threat from the Trump administration, she argues. “If rich colleges simply utilize more of their massive savings to further social justice, impact poverty, and enhance public good—particularly in their own at-risk communities—they will not only avoid federal taxation but also begin to address critiques about their elitism and greed,” she wrote during Trump’s first term.