Wealthy Private Colleges Secure Reduced Tax Rates Due to Republican Decision
In a significant move, the recently passed One Big Beautiful Bill has introduced higher taxes on the endowments of some of the country's wealthiest universities. The new bill, which increases the current 1.4% excise tax on college endowments' investment earnings, will see rates as high as 21% for the richest institutions.
Eleven institutions, including Princeton, MIT, Yale, and Harvard, will see an increase in their tax on endowment investment earnings. However, the Senate's Finance Committee has settled on more modest rate hikes, with schools having endowments worth more than $2 million per student paying an 8% tax on their earnings.
Notably, smaller schools, including "woke" ones, have been exempted from the tax, while levying a rate of up to 8% on the endowments of bigger schools. This exemption applies to schools with fewer than 3,000 full-time equivalent tuition-paying students, such as Hillsdale College, an ultra-conservative, Christian liberal arts college in Hillsdale, Michigan, which enrolled 1,794 students in 2023 and had an endowment worth $584,000 per student.
The Senate's decision to exempt certain schools from the endowment tax increase is based on their lack of participation in federal student aid programs. For instance, Hillsdale College accepts no federal money, including student aid.
On the other hand, larger private universities with substantial endowments, which typically have significant federal student aid participation, are subject to higher taxes under the new tiered tax structure. Institutions like Grinnell College, which enrolled 1,790 students in 2023, will save around $2.4 million in tax each year due to the change.
The rationale behind the higher rates for these schools is based on the belief that their growing endowments can and should contribute more to federal revenue. However, critics argue that such hikes will reduce funds available for scholarships, research, and other academic purposes.
Under the latest Senate proposals, wealthier private colleges and universities with endowments between $500,000 and $749,999 per student remain at the current 1.4% tax rate, while those with endowments above $750,000 per student may face rates up to 8%. Some wealthy small private colleges, primarily those that do not accept federal financial aid, are being exempted from the endowment tax increase.
The distinction thus revolves around both the size of the endowment and the institution’s relationship to federal financial aid programs. A broader group of small schools pushed for the exemption, arguing that their endowments weren't big compared to larger schools.
The changes will result in colleges paying an extra $761 million in tax over 10 years, compared to the extra $6.7 billion they would have paid under the House version with its higher 21% rate and broader reach. Notre Dame, a Catholic-affiliated school, expressed disappointment about the removal of language protecting religious institutions of higher education from the endowment tax before the final bill's passage.
[1] Source: Inside Higher Ed [2] Source: The Washington Post [3] Source: The New York Times [4] Source: Forbes [5] Source: The Hill
Finance ministers in Congress, following the passage of the One Big Beautiful Bill, are debating the implications of the increased endowment tax on education-and-self-development institutions. For instance, big schools like Harvard University and Princeton University, which have substantial endowments, will face higher taxes due to their investment earnings.
On the other hand, smaller schools, such as Hillsdale College, an ultra-conservative, Christian liberal arts college in Hillsdale, Michigan, have been exempted from the tax increase. This is because these smaller schools, like Hillsdale College, do not participate in federal financial aid programs and thus are excluded from this tax hike.
