Senate Proposes A Smaller Increase For University Endowment Tax

Forbes

17-06-2025

The Senate version of a proposed tax hike on private university endowment earnings offers some ... More relief to colleges.
The U.S. Senate Committee on Finance has proposed a smaller increase to the endowment tax on private universities and colleges than the reconciliation tax and spending bill previously passed by the House of Representatives.
According to the committee's plan, the top rate would be 8% on endowment earnings versus the 21% that had been set by the House. The Senate version retains the House's tiered structure that specifies that the tax rate grows as the size of the endowment per student increases, and it also includes a similar methodology for calculating the tax rate.
Both plans raise the tax on the endowment earnings of private colleges and universities from its current 1.4% flat rate. Currently, a few dozen private universities with at least 500 full-time equivalent students and an endowment worth at least $500,000 per student are subject to a 1.4% tax on endowment earnings, a levy that was passed during Trump's first term.
Under the new proposals, the increases would be tiered.
Both plans also change how the number of enrolled students is calculated. By excluding foreign and undocumented students from the count, the proposals increase both the number of institutions subject to endowment taxes and the number who would have to pay a larger rate. Religious colleges would be exempted from the tax under both proposals, but what schools qualify as being religious will likely be debated.
One difference in the two plans is that the Senate would exempt colleges that don't accept federal financial aid from paying the tax. The House version does not include that exemption.
The Senate's softening of the endowment tax increase will be seen as an improvement for institutions, although it fails to provide all the relief they have been lobbying for.
Schools have been trying to persuade legislators to lighten up on the tax increase, arguing that if it becomes law, it will result in the reduction of hundreds of millions of dollars in financial aid for students.
According to the 2024 NACUBO-Commonfund Study of Endowments, the largest share of endowment spending — 48.1% — goes to provide financial aid through institutional scholarships and tuition discounts. Should endowment taxes increase, dozens of prominent institutions may need to reduce their spending on helping financially needy students be able to attend college.
"The Senate version of the so-called endowment tax is better, but it's still bad and harmful tax policy,' said Steven Bloom, American Council on Education assistant vice president of government relations​​, according to Inside Higher Education. 'They're going to take money that would likely have been devoted to financial aid and research and other academic purposes on campus, and they're going to send it to Washington, where it's used largely for purposes unrelated to higher education.'
Expect colleges and universities to continue to press legislators for modifications to the tax hike. Among the alternatives they have suggested is a promise to spend more of their endowment's earnings on student financial aid in exchange for a lower tax rate. Other have pitched the idea that small colleges should get a break on how much they are required to pay or that the rate should be adjusted based on the number of students from low-imcome families that are enrolled.
The House and Senate will need to iron out the discrepancies in their two versions of the overall reconciliation bill later this summer. The two packages involve major differences in policy that go far beyond disagreements over the endowment tax, making it increasingly unlikely that final legislation will be enacted by the target date of July 4.