Endowment Tax Reform: Risk Implications for Higher Education
In 2017, Congress passed the first excise tax on college endowments. The rate is 1.4%, affecting colleges with 500 or more tuition-paying students and institutions with at least $500,000 in endowment funds per student.
According to Higher Ed Dive, "A list of House policy priorities, leaked in January 2025, included the possibility of raising the endowment tax to 14% while keeping the $500,000-per-student parameter. The document estimated the change would raise $10 billion in 10 years." This is significant. Still, House Republican Troy Nehls of Texas introduced an alternative bill in January that would "increase the tax even higher to 21% — the same rate that for-profit corporations pay."
This means that tax reforms will no longer target the wealthiest colleges and the Ivy League but rather point to a systemic policy shift with broader implications. The impact could extend beyond elite institutions, impacting mid-tier and regional university finances.
However, according to a Chronicle of Higher Education article - "While many House Republicans are eager to hike the endowment tax, the Senate is likely to take a more circumspect view of the issue — Bloom, of ACE, doubts that Republican senators have "the appetite to make significant changes to the endowment tax" and will push out most of the drastic shifts."
So, what does this mean? It means more financial uncertainty but as leaders we have to make decisions with limited information. By being proactive and flexible and by incorporating a risk management mindset, we can facilitate decision-making in times of disruption.
Let's start with identifying the potential downstream risks. I have outlined a few below:
College affordability - tuition increases will further accelerate the enrollment cliff.
Constraints on budgets can impact important research and hinder innovation.
Cuts to student services
Reduced scholarship funds available to students
Reduced infrastructure investments (and deferred maintenance is already a top risk!)
How can these risks be mitigated? Measures that can help leaders, boards, and fiduciaries offset the risk while avoiding tuition increases are:
Find ways to diversify revenue streams to mitigate shortfalls. Examples include creating public/private partnerships and/or leasing spaces for innovation zones.
Engage openly and proactively with policymakers to foster better communication and find ways for mutual understanding.
Liaise with professional associations to have your voice heard and amplified.
Support investments in micro-credentials and workforce development programs to diversify program offerings.
Review endowment investment and allocation strategies.
Bottom line:
We will have to wait and see how things pan out, but in the meantime, let your preparedness become your institution's competitive advantage in managing risk.
