The “one big beautiful” tax-and-spending package President Donald Trump signed on Friday included several significant changes for higher education — among them, an increased tax on the endowment income of the nation’s top colleges.
Instead of the existing flat 1.4% tax rate, there is now a new multi-tiered rate of up to 8%, with larger endowments subject to the highest rate. (Schools with fewer than 3,000 tuition-paying students are exempt, regardless of their endowment size.)
The Joint Committee on Taxation estimates this endowment tax will bring in $761 million over 10 years. Higher education experts say the new, higher tax rates could lead to revenue shortfalls and cause some schools to raise tuition prices, cut financial aid or both.
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The exemption for schools with fewer than 3,000 tuition-paying students scaled back the plan from earlier versions of the GOP’s marquee legislation. “It’s not an endowment tax anymore, it’s a research university tax,” said Rick Grafmeyer, a partner at Capitol Tax Partners in Washington.
According to a recent analysis from Forbes, at least 11 colleges and universities — including many of the nation’s top research institutions — will have their endowment earnings taxed at an 8% or 4% rate in 2026, while five will pay a 1.4% tax. Previously, 56 universities paid about $380 million under that endowment tax rate.
Yale University.
Yana Paskova / Stringer (Getty Images)
Yale University warned that the tax hike would have immediate consequences for the school’s bottom line.
“Although the endowment tax is lower than what the House passed originally, it still means that Yale will pay an estimated $280 million in the first year it is in effect, and likely more in subsequent years,” Yale’s President Maurie McInnis said in a statement on July 3. Earlier versions of the proposal called for tiered rates as high as 21%.
The university announced before the bill passed that it had already implemented a temporary hiring freeze, lowered annual salary increases for faculty and staff members and delayed several construction projects at the school in anticipation of the tax increase and other federal actions.
Colleges to face ‘unprecedented fiscal challenges’
Higher endowment taxes, along with restrictions on international student enrollment and major cutbacks of federal and state funds, put many colleges in a precarious financial position, according to Robert Franek, editor in chief of The Princeton Review.
“Colleges, both private and public, are facing unprecedented fiscal challenges this year and en masse,” Franek said.
“Most concerning, for prospective students, is these factors may cause tuitions to be higher and reduce the amount of financial aid schools award,” he added.
At some colleges, the higher endowment tax exceeds the college’s total financial aid budget, according to higher education expert Mark Kantrowitz, “making it difficult for colleges to continue to award very generous financial aid.”
Typically, when it comes to offering aid, wealthier institutions have more money to spend. Those generous aid packages remove the most significant financial barrier to higher education and help attract lower-income applicants.
Tuition hikes are likely to follow the higher endowment tax, other experts also say. “We’re already seeing evidence that institutions are raising their sticker prices more than they have been in the past,” Phillip Levine, a fellow at the Brookings Institution and professor of economics at Wellesley College, told CNBC.
College tuition has surged by 5.6% a year, on average, since 1983, significantly outpacing other household expenses, a recent study by J.P. Morgan Asset Management found.
Going forward, “it doesn’t seem like 5% or 6% is out of line or beyond what schools are willing to do, and that’s at [both] public and private institutions,” Levine said. “And they’re doing this because they’re expecting revenue shortfalls.”
— Senior field producer Stephanie Dhue contributed to this report.