Explained: Which US universities will pay higher endowment taxes from 2026 under Trump's law and why it matters

Time of India

a day ago

A significant shift in federal tax policy is poised to reshape the financial landscape of America's most prestigious private universities starting in 2026. This change, enacted under President
Donald Trump
's administration as part of a comprehensive spending bill, introduces a tiered tax system targeting the endowments of the wealthiest institutions.
While these universities are renowned for their vast financial reserves, the forthcoming tax increase raises critical concerns about potential impacts on financial aid, research funding, and university operations.
Understanding the new endowment tax structure
The concept of taxing university endowments is not new. During Trump's first term, a 1.4% excise tax was imposed on the investment income of private colleges and universities with substantial endowments.
However, the recent legislation amplifies this tax, introducing a tiered system based on the size of endowment assets per enrolled student.
Drawing on data from the
National Association of College and University Business Officers
, the new tax rates will be as follows:
An 8% tax rate will apply to universities with endowment assets exceeding $2 million per student.
A 4% tax rate will be levied on institutions with assets between $750,000 and $2 million per student.
The existing 1.4% rate remains for schools with assets ranging from $500,000 to $750,000 per student.
This tax framework applies exclusively to private institutions enrolling at least 3,000 students, raising the previous threshold from 500 students.
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As Steven Bloom, assistant vice president of government relations at the American Council on Education, noted, this effectively narrows the tax's focus to elite private research universities.
Which universities are most affected?
The legislation is expected to impact approximately a dozen universities. At the highest 8% tax tier, institutions such as Harvard University, Yale University, Stanford University, Princeton University, and the Massachusetts Institute of Technology (MIT) will face substantial increases in their tax obligations.
Universities subject to the 4% tax include Notre Dame, Dartmouth College, Rice University, the University of Pennsylvania, Washington University in St. Louis, and Vanderbilt University. Institutions such as Duke University and Emory University narrowly missed the threshold last fiscal year but remain close to the cutoff.
The role of endowments and potential consequences
Endowments consist primarily of donor contributions invested to generate income that supports university operations.
Typically, colleges allocate around 5% of their endowment earnings annually toward their budgets. These funds are crucial for financing scholarships, faculty positions, and research initiatives.
Despite the considerable wealth held by these universities, the increased tax burden is likely to strain budgets. According to the
Associated Press,
Phillip Levine, an economist and professor at Wellesley College, explained that universities are seeking savings wherever possible.
He emphasised the significance of endowment spending in reducing the cost of education for lower- and middle-income students, warning that those institutions facing the highest tax rates are often those charging these students the least.
Rice University in Houston provides a concrete example. Officials anticipate an additional $6.4 million in tax payments, equivalent to over 100 student financial aid packages.
The university has pledged to explore alternatives to cutting aid but acknowledged the fiscal pressure.
How universities are responding to financial pressures
Already, universities are making adjustments in anticipation of the new tax. Yale University cited an estimated $280 million increase in endowment taxes as part of the rationale behind a campus-wide hiring freeze. Stanford University has announced plans to reduce its operating budget by $140 million for the upcoming academic year, including 363 layoffs and a continuation of its hiring freeze.
Nevertheless, Stanford has committed to maintaining undergraduate financial aid and funding for doctoral students.
Further compounding these financial challenges are reductions in federal research funding from agencies such as the National Institutes of Health and the National Science Foundation. Harvard University, which possesses the largest endowment in the country valued at $53 billion, exemplifies this pressure.
Beyond the tax, Harvard faces a freeze on $2.6 billion in research grants tied to civil rights investigations, alongside additional policy impacts that could cost the university up to $1 billion annually.
Why this matters
While institutions like Harvard will remain among the world's leading universities, the combined financial pressures are unlikely to be without consequences. As Levine observed, although these universities are unlikely to become mediocre overnight, the strain will result in tangible challenges.
There may be reductions in support for students and researchers, and the accessibility of elite education for economically disadvantaged students could be at risk.
The tax hike under Trump's law signifies a pivotal moment in higher education finance. It reflects broader debates about wealth concentration in academia and the role of public policy in addressing inequality. For prospective students, families, and educators, understanding which universities will be affected and the potential ramifications is critical as the landscape shifts in 2026.
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