Wealthy Colleges Face Expanded Endowment Tax
Over the past year, colleges have faced several headwinds, including funding cuts, political entanglements, and student concerns about affordability and return on investment. Now, some wealthy colleges are facing another obstacle: an expanded tax on their endowments.
A new tiered endowment tax
The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, established a new tiered tax rate on the endowments of wealthy colleges and universities starting in 2026.
Previously, private schools with at least 500 tuition-paying students and an endowment of at least $500,000 per student paid a 1.4% tax on the net investment income from their endowments. This tax, enacted by the Tax Cuts and Jobs Act of 2017, was the first time a federal tax had been levied on educational institutions. In 2023, 56 schools paid $381 million in endowment tax.1
Under OBBBA, starting in 2026, private colleges and universities with more than 3,000 tuition-paying students will be subject to a new tiered tax rate based on an “endowment dollars per student” model as follows:
- $500,000 to $750,000 endowment per student: 1.4%
- $750,001 to $2 million endowment per student: 4%
- Over $2 million endowment per student: 8%
Based on prior endowment values and enrollment numbers, 15 universities — many of the nation’s top research institutions — are expected to be subject to the new rates in 2026, with 10 schools facing an 8% or 4% tax rate and five schools remaining at the 1.4% rate.2 Congressional tax analysts have estimated that the new tiered tax rates will bring in $761 million over 10 years, money that will flow into the general coffers of the U.S. Treasury.3 The winners under the new rules are the more than two dozen smaller, highly selective colleges that were paying a 1.4% tax pre-2026 but will now be exempt from any endowment tax because they enroll fewer than 3,000 tuition-paying students.4
Impact on colleges and students
Colleges generally rely on income from their endowments to act as a cushion to help protect their budgets from cyclical pressures, unanticipated changes in enrollments, and other temporary revenue disruptions. Colleges also use their endowments to fund research, institutional operations, and financial aid programs for undergraduate and graduate students, among other things. Schools impacted by the new endowment tax could potentially adjust their spending in these areas, possibly leaving students with reduced financial aid packages, research opportunities, and/or college enrichment programs.