WASHINGTON (AP) — A tax on the endowments of America’s wealthiest colleges began during President Donald Trump’s first administration, collecting 1.4% of their investment earnings. Under Republican proposals on Capitol Hill, that rate could increase by tenfold or more.
As Trump spars with prestigious colleges he accuses of “indoctrinating” students with leftist ideas, calls to raise the tax have gained momentum.
Republicans have questioned whether colleges with huge endowments — tens of billions of dollars, in some cases — should be entitled to tax breaks that are not offered to businesses. Proposals to increase the tax have come as the House looks to cut or offset $1.5 trillion in spending as part of the president’s sweeping tax bill.
Colleges say the proposed increases would take money that otherwise could go to financial aid and other support for students. The American Council on Education, which lobbies on behalf of college presidents, calls it a “tax on scholarships.”
What is the endowment tax?
In 2017, Congress passed the 1.4% tax on wealthy colleges’ investment earnings. It applies to colleges with at least 500 tuition-paying students and endowments worth at least $500,000 per full-time student.
Before that, colleges weren’t taxed on their endowment income.
The tax reflected a sentiment that some colleges were too concerned with generating investment income, with huge endowments that operate like hedge funds. Critics pointed to colleges like Harvard, Yale and Stanford, with tens of billions of dollars.
Harvard and dozens of other schools opposed the tax, calling it “an unprecedented and damaging tax on the charitable resources” of universities.
How does the tax work?
Those hit by the tax include big Ivy League schools along with smaller liberal arts colleges that have accrued large endowments.
Endowments are made up of donations that are invested to maintain the money over time. Colleges often draw about 5% of their investment earnings every year to put toward their budgets. Much of it goes toward student financial aid, along with other costs like research or endowed faculty positions.
The 1.4% applies to those investment earnings. In 2024, Harvard was taxed more than $40 million. For some smaller schools, the bill was closer to $1 million.
A relatively small number of schools are subject to the tax. In 2023, the tax generated $380 million from 56 colleges.
Would the new tax affect other nonprofits?
Not directly. The proposed tax increase applies only to certain colleges and universities and not other nonprofit organizations. But in the past, some colleges have argued that any endowment tax threatens the tax-exempt status of other charitable groups.
Some say a tax increase would chip away at the idea that colleges provide a public benefit that deserves to be protected from taxation — a principle that applies to other tax-exempt groups.
What’s being proposed?
House Republicans already were considering a hike in the tax on college endowments’ earnings from 1.4% to 14% as part of Trump’s tax bill. As the president raises the stakes in his fight with Harvard and other Ivy League schools, lawmakers are floating raising the rate as high as 21% in line with the corporate tax rate. It appears no decisions have been made.
A separate proposal being looked at would expand the number of schools subject to the tax. It would change the calculation used to determine if a school has $500,000 per student, counting only U.S. citizens and residents. If approved, roughly a dozen additional colleges would be subject to the tax.
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