Key Takeaways
- • The endowment tax in the "one big beautiful" tax-and-spending package signed by President Donald Trump replaces the flat 1.4% rate with a multi-tiered rate of up to 8%, with the largest endowments facing the highest rate, according to CNBC.
- • The Joint Committee on Taxation estimates the revised endowment tax will raise $761 million over 10 years.
- • Schools with fewer than 3,000 tuition-paying students are exempt regardless of endowment size, narrowing the tax to large research universities, per Rick Grafmeyer of Capitol Tax Partners.
- • Yale University projects it will pay an estimated $280 million in its first year under the tax, according to President Maurie McInnis.
- • Higher education experts warn the tax could push colleges to raise tuition, cut financial aid, or both, with Phillip Levine of Brookings and Wellesley College noting tuition has risen 5.6% annually since 1983.
Summary
President Donald Trump signed a tax-and-spending package that includes a significant overhaul of the federal endowment tax on the nation's wealthiest colleges. The existing flat 1.4% rate has been replaced by a new multi-tiered structure with rates of up to 8%, with the largest endowments subject to the highest rate. Schools with fewer than 3,000 tuition-paying students are exempt regardless of endowment size. The Joint Committee on Taxation estimates the provision will generate $761 million over 10 years.
The exemption scaled back the provision from earlier versions of the legislation. Rick Grafmeyer, a partner at Capitol Tax Partners in Washington, described the outcome as "not an endowment tax anymore, it's a research university tax." According to a Forbes analysis cited by CNBC, at least 11 colleges and universities, including many leading research institutions, will be taxed at an 8% or 4% rate in 2026, while five will pay 1.4%. Previously, 56 universities paid about $380 million under the prior rate. Earlier proposals had called for rates as high as 21%.
Yale University warned of immediate financial effects. In a statement on July 3, President Maurie McInnis said the school will pay an estimated $280 million in the first year the tax is in effect, and likely more in later years. Before the bill passed, Yale had already instituted a temporary hiring freeze, reduced planned salary increases for faculty and staff, and delayed several construction projects in anticipation of the tax and other federal actions.
Higher education experts expect the changes to affect students directly. Robert Franek, editor in chief of The Princeton Review, said colleges are facing "unprecedented fiscal challenges," and that the combined pressures of higher endowment taxes, restrictions on international enrollment, and federal and state funding cuts may lead to higher tuition and reduced aid. Mark Kantrowitz, a higher education expert, said at some colleges the increased endowment tax exceeds the total financial aid budget. Phillip Levine of the Brookings Institution and Wellesley College said institutions are already raising sticker prices faster than in the past. A J.P. Morgan Asset Management study found college tuition has risen 5.6% annually on average since 1983.
The exemption scaled back the provision from earlier versions of the legislation. Rick Grafmeyer, a partner at Capitol Tax Partners in Washington, described the outcome as "not an endowment tax anymore, it's a research university tax." According to a Forbes analysis cited by CNBC, at least 11 colleges and universities, including many leading research institutions, will be taxed at an 8% or 4% rate in 2026, while five will pay 1.4%. Previously, 56 universities paid about $380 million under the prior rate. Earlier proposals had called for rates as high as 21%.
Yale University warned of immediate financial effects. In a statement on July 3, President Maurie McInnis said the school will pay an estimated $280 million in the first year the tax is in effect, and likely more in later years. Before the bill passed, Yale had already instituted a temporary hiring freeze, reduced planned salary increases for faculty and staff, and delayed several construction projects in anticipation of the tax and other federal actions.
Higher education experts expect the changes to affect students directly. Robert Franek, editor in chief of The Princeton Review, said colleges are facing "unprecedented fiscal challenges," and that the combined pressures of higher endowment taxes, restrictions on international enrollment, and federal and state funding cuts may lead to higher tuition and reduced aid. Mark Kantrowitz, a higher education expert, said at some colleges the increased endowment tax exceeds the total financial aid budget. Phillip Levine of the Brookings Institution and Wellesley College said institutions are already raising sticker prices faster than in the past. A J.P. Morgan Asset Management study found college tuition has risen 5.6% annually on average since 1983.
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