University endowment tax hike is costing students, not just colleges: Here’s why it matters more than you think
A significant hike in the tax on university endowments is placing financial pressure on some of the wealthiest private research universities in the US. The new law, signed by President Donald Trump as part of a broader spending bill, introduces a tiered system that will see institutions such as Harvard, Yale and Stanford paying hundreds of millions more in taxes.The tax hike, which takes effect in 2026, is already prompting hiring freezes, staff layoffs and budget cuts across top-tier universities. Experts and college officials have warned that these financial strains may also impact the availability of student financial aid, particularly for lower- and middle-income students.New tiered tax system targets wealthiest universitiesThe revised endowment tax replaces the previous flat 1.4% rate introduced during Trump’s earlier term. Under the new structure, universities with endowment assets exceeding $2 million per enrolled student will be taxed at 8%. Institutions with assets between $750,000 and $2 million per student will face a 4% tax, while those with $500,000 to $750,000 per student will remain at 1.4%.As reported by the Associated Press, the tax applies solely to private universities in the US with at least 3,000 students, up from the previous threshold of 500 students. Only around a dozen universities are expected to meet the new tax criteria.Leading institutions among those most affectedHarvard, Yale, Stanford, Princeton and the Massachusetts Institute of Technology are among the universities expected to be taxed at the 8% rate. Institutions projected to pay the 4% rate include Dartmouth College, University of Pennsylvania, Rice University, Washington University in St. Louis, Vanderbilt University and Notre Dame. Duke and Emory are close to the $750,000-per-student threshold but currently fall below it, according to the Associated Press.Endowments are built from donor contributions and are invested to generate long-term returns. Typically, universities spend around 5% of their endowment income annually, with large portions going towards scholarships, research and faculty positions.Staff cuts and budget reductions already underwaySeveral universities have begun implementing measures to absorb the anticipated tax burden. Yale University cited the endowment tax in a campus communication explaining its hiring freeze. Stanford University announced a $140 million reduction in its operating budget, including 363 staff layoffs and a hiring freeze, as reported by the Associated Press.At Rice University, officials expect to pay an additional $6.4 million in taxes, equivalent to more than 100 student financial aid packages. The university stated that it would explore all other options before reducing support, according to the Associated Press.Impact on financial aid and accessPhillip Levine, an economist and professor at Wellesley College, told the Associated Press that the tax could limit universities’ ability to offer aid. He said the institutions most affected by the tax are the ones providing the highest levels of financial support to students.Steven Bloom, assistant vice president of government relations at the American Council on Education, explained to the Associated Press that the tax will divert funds away from financial aid, as universities will be required to allocate more of their endowment income to cover the tax expense.Federal funding pressures add to financial strainAlongside the endowment tax, research universities are also contending with declining federal funding from agencies such as the National Institutes of Health and the National Science Foundation. Harvard has reported that the impact of administration policies could cost the university up to $1 billion annually.As reported by the Associated Press, the federal government has frozen $2.6 billion in Harvard’s research grants amid civil rights investigations.TOI Education is on WhatsApp now. Follow us here.
