Higher education insiders predict the nation’s top universities will pass the cost of a looming endowment tax hike onto students and donors, evading a Trump administration push to reduce expenses.
Starting next year, the One Big Beautiful Bill Act will modify the tax on private university endowments’ net investment gains from a flat 1.4% rate to a progressive levy ranging up to 8% for the nation’s wealthiest schools.
The conservative American Enterprise Institute estimates that 20 schools will pay $1.7 billion under higher excise rates in 2026, increasing to $2.5 billion in 2030 as more endowments grow and reach taxable levels. Most of next year’s tax revenue will come from Harvard University ($368.2 million), Yale University ($275.6 million), Princeton University ($217.4 million) and Stanford University ($202.5 million).
Trump administration officials insist the endowment tax increases will push woke campuses to spend more of their multibillion-dollar endowments on making education more affordable.
“As the cost of tuition continues to rise across the country, many colleges and universities have built up enormous endowments that remain largely untapped,” Department of Education spokeswoman Savannah Newhouse said in an email. “Increasing the tax on these endowments is a long-overdue step toward leveling the playing field and ensuring that elite universities share in the financial responsibility carried by students and taxpayers.”
Academics interviewed by The Washington Times from across the political spectrum said elite schools are more likely to cover the tab by raising tuition, gutting financial aid and asking Trump-hating donors for bigger checks.
“While we hope that universities will choose to cut administrative bloat and unconscionable salaries for college leaders, we expect donors and students will end up fronting the tax bill,” said Rebecca Richards, a higher education philanthropy adviser at the American Council of Trustees and Alumni, a liberal arts advocacy group. “We often see that students end up carrying most of the burden of high college costs through increased tuition and cuts to financial aid.”
Mohammad Elahee, an international business professor at Quinnipiac University in Connecticut who opposes the levy, expects tax revenues to dry up as schools offload assets.
“Big universities will initially pay the tax, but eventually they will hire tax consultants and lawyers and find creative ways to reduce the tax burden,” said Mr. Elahee, whose private campus is exempt. “For example, some universities, instead of reinvesting endowment income for further boosting their endowment, may spend that on capital expenditure.”
Because the new tax is based on endowment dollars per student, analysts say, the few dozen universities affected can also avoid the highest rates by simply boosting enrollment.
“The top schools will take more students,” said Gary Stocker, a former private college administrator who founded College Viability to evaluate campuses’ financial health. “The best will pull students from [weaker institutions], and that reaction will ultimately impact the most financially unhealthy colleges with a loss of student tuition revenue.”
Elite private schools have long used investment income from their endowments — including stocks, bonds and real estate — to fund long-term projects such as scholarships and chaired professorships.
Decades of federal tax breaks and research grants bolstered endowment donations, helping administrators increase financial aid and keep tuition low.
In 2017, the first Trump administration imposed a flat 1.4% tax on all private, nonprofit campuses with at least 500 students and endowments of $500,000 per student or more.
The second Trump administration has ratcheted up that tax as it seeks to end decades of liberal higher education policies, including racial preferences favoring minorities in admissions and hiring.
“Regardless of what is claimed, the endowment tax is not intended to make college more affordable,” said Tim Cain, a University of Georgia higher education professor. “The endowment tax is intended to punish a sector that the administration dislikes, and it will lead to increased costs for students and their families.”
Paying up
Under the new tax, only private campuses with endowments of $500,000 to $750,000 per student will continue paying 1.4%. Those with fewer than 3,000 full-time students will pay nothing at all.
The rate increases to 4% of endowments from $750,000 to $2 million per student. It jumps to 8% for endowments larger than $2 million per student, excluding international students from the dollars-per-student calculation.
“There has long been criticism of universities with large endowments and high tuition that do not use the endowment to offset their tuition costs,” said Ron Flowers, a higher education professor at Eastern Michigan University. “I am not sure this will have any impact on this issue.”
Academics skeptical of the Trump administration’s claims note that donor restrictions keep top schools from changing how they spend endowment profits.
“Everyone should understand that endowments are often restricted to be spent only as a donor has specified,” said Dick Startz, an economist at the University of California, Santa Barbara. “If a donation is to help pay the football coach, you can’t use the money for undergraduate scholarships.”
Others say universities have long found ways to do what they like with donations, subverting the desires of uncooperative alumni. They expect elite schools to use the new tax as an excuse to remove donor gift restrictions, making that task even easier.
“Given how lax some universities are with gift restrictions, this newfound concern for donor intent might be a pretense,” said Ms. Richards of the American Council of Trustees and Alumni. “One case, which must remain anonymous, comes to mind where a donor funded several scholarships per year at a large state school’s law program. Despite qualified candidates and ample funds, the school refused to award the full number of scholarships.”
Uncertain future
Although the Trump administration has presented the tiered endowment tax as a game-changer for higher education, it remains unclear how deeply it will impact the sector.
Most analysts agree that Yale, Harvard, Princeton and the Massachusetts Institute of Technology will be among those paying the top 8% rate based on past financial statements.
Seven universities, including Stanford, Dartmouth and Vanderbilt, will likely pay 4%. Duke, Brown, Emory, the University of Pennsylvania and Washington University in St. Louis will owe the same 1.4% they are already paying.
The new law exempts some wealthy small schools that previously paid the 1.4% rate from owing anything at all. They include Amherst, Hillsdale, Williams and Caltech.
“The big losers in this contest are the large research universities, because they have the highest per-pupil endowments,” said Jonathan Zimmerman, a professor of the history of education at the University of Pennsylvania. “The winners are the fancy small colleges. It’s not entirely clear to me why Penn should be taxed at a higher level than, say, Amherst or Williams.”
Financial experts say university endowments have historically averaged a 6.6% annual return on investment. About 4% to 5.5% of endowments are available to be spent each year.
For example, a $1 million gift to endow scholarships would yield $40,000 to $50,000 of annual awards, with wise stock market investments ensuring its continuation.
Dan Sutter, an economist at public Troy University in Alabama, said the new tiered rates could cut annual endowment growth to 6%, eroding scholarships at top schools. Still, he said long-term effects depend on what future presidential administrations do.
“The biggest issue going forward would be if this is the camel’s nose getting into the tent,” Mr. Sutter said. “Is this a sign of more taxes on universities going forward?”
Jack Salmon, an economist at George Mason University’s free market Mercatus Center, noted that the number of private colleges subject to the current 1.4% rate exploded from 33 paying $68 million in 2021 to 56 paying $381 million in 2023.
“Due to endowment fund growth the tax is likely to capture more colleges over time,” Mr. Salmon said.
Nevertheless, he said the tax “is still minuscule” compared with the large endowments of many colleges. That includes Harvard, which he estimated paid only $18.2 million in taxes on a $1.3 billion gain that bumped its endowment to $49 billion in 2022.
“Such a small burden in the grand scheme of things is unlikely to nudge colleges to adjust their enrollment practices or to seek to make college more affordable,” Mr. Salmon said.
Peter Wood, president of the conservative National Association of Scholars, said the total number of colleges impacted by the new tax is “too small to have much effect” on university politics.
“The main effects will be limited to the handful of colleges that have to pay the tax, and they are wealthy enough to bear it,” said Mr. Wood, a former associate provost at private Boston University.
• Sean Salai can be reached at ssalai@washingtontimes.com.