Key Takeaways
- • The One Big Beautiful Bill Act raises the endowment tax on private nonprofit universities enrolling at least 3,000 students (up from a 500-student threshold), with tiered rates of 1.4%, 4%, and 8% on net investment income based on assets per student, according to the American Enterprise Institute (AEI).
- • AEI estimates about 20 universities will likely be subject to the tax next year, with Harvard facing up to $368 million, Yale up to $276 million, Princeton $217 million, and Stanford $202 million.
- • Over the next five years, Harvard, Yale, Princeton, Stanford, and MIT could each pay more than $1 billion, per AEI projections built on IRS Form 990 data and IPEDS enrollment figures.
- • Schools such as Cornell, Carnegie Mellon, and Holy Cross are not currently liable but could cross the $500,000 assets-per-student threshold within five years if endowment growth outpaces enrollment growth.
- • Actual revenue may diverge from estimates, as enrollment expansion, tax-sheltering, or realizing capital losses could reduce liability, while forced endowment drawdowns to offset frozen federal funding could raise it.
Summary
Under the One Big Beautiful Bill Act, universities with large endowments face a higher tax on their investment income. The law applies to private nonprofit institutions of higher education that enroll at least 3,000 students, up from the previous 500-student threshold. It establishes three tiers of tax on net investment income: endowments between $500,000 and $750,000 in assets per student remain at the current rate of 1.4 percent, those between $750,001 and $2 million per student will be taxed at four percent, and endowments above $2 million per student will face an eight percent rate. For comparison, private foundations pay 1.39 percent and corporations pay 21 percent, according to AEI.
AEI estimated taxable income for the past five years using IRS Form 990 filings released by ProPublica, calculating it as Investment Income plus Sales of Assets, since net investment income includes realized capital gains, student loan interest, dividends, and federally subsidized royalties. The average eligible endowment earned roughly 6.6 percent of its total value in annual taxable income, while endowments typically spend 4.5 to 5.5 percent annually and reinvest the remainder. Using IPEDS data, AEI projected each institution's endowment growth over five years and applied historical taxable income rates to estimate future liability.
AEI expects around 20 universities to be subject to the tax next year, with the burden concentrated among the wealthiest institutions. Harvard could owe as much as $368 million, and Yale could owe $276 million, a figure consistent with the approximately $280 million Yale's president recently cited for the first year. Princeton could face a $217 million bill and Stanford $202 million. Over five years, these four schools along with MIT could each pay more than $1 billion.
Cornell, Carnegie Mellon, and Holy Cross are not currently expected to owe the tax, but AEI notes they could cross the $500,000 assets-per-student threshold within five years if endowment growth continues to outpace enrollment growth.
AEI cautions that actual revenue could differ from its estimates if universities change behavior. Expanding enrollment would lower assets per student and therefore tax liability. Tax-sheltering strategies or realizing capital losses on underperforming assets could also reduce taxable income. Conversely, if Harvard and similar schools must draw more heavily on endowments to offset frozen federal funding, liabilities could exceed projections. Because endowments typically hold only three to five percent in cash and spend roughly that amount annually, institutions may need to sell high-performing assets, generating capital gains taxable under the new regime.
AEI estimated taxable income for the past five years using IRS Form 990 filings released by ProPublica, calculating it as Investment Income plus Sales of Assets, since net investment income includes realized capital gains, student loan interest, dividends, and federally subsidized royalties. The average eligible endowment earned roughly 6.6 percent of its total value in annual taxable income, while endowments typically spend 4.5 to 5.5 percent annually and reinvest the remainder. Using IPEDS data, AEI projected each institution's endowment growth over five years and applied historical taxable income rates to estimate future liability.
AEI expects around 20 universities to be subject to the tax next year, with the burden concentrated among the wealthiest institutions. Harvard could owe as much as $368 million, and Yale could owe $276 million, a figure consistent with the approximately $280 million Yale's president recently cited for the first year. Princeton could face a $217 million bill and Stanford $202 million. Over five years, these four schools along with MIT could each pay more than $1 billion.
Cornell, Carnegie Mellon, and Holy Cross are not currently expected to owe the tax, but AEI notes they could cross the $500,000 assets-per-student threshold within five years if endowment growth continues to outpace enrollment growth.
AEI cautions that actual revenue could differ from its estimates if universities change behavior. Expanding enrollment would lower assets per student and therefore tax liability. Tax-sheltering strategies or realizing capital losses on underperforming assets could also reduce taxable income. Conversely, if Harvard and similar schools must draw more heavily on endowments to offset frozen federal funding, liabilities could exceed projections. Because endowments typically hold only three to five percent in cash and spend roughly that amount annually, institutions may need to sell high-performing assets, generating capital gains taxable under the new regime.
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