Issue Briefs

Overview

There is a misperception by many that college and university endowments are simply slush funds that can be used by institutions however and whenever they please. There is particular attention being paid to private colleges' endowments. Many believe that most private, nonprofit colleges and universities have billions in endowment funds, while in reality the median private college endowment is $42.2 million, slightly lower than the median public college endowment of $42.4 million (FY 2022 IPEDS).

A variety of proposals on and off Capitol Hill suggest that federal legislation should either: (a) require mandatory endowment payouts to be used to lower tuition; or (b) expand the tax on the endowments of private colleges.

The Tax Cuts and Jobs Act of 2017 (TCJA) imposed a 1.4% excise tax on private college endowment investment returns, based on a formula of endowment assets of $500,000 per Full Time Equivalent (FTE) student. Using the most recent IPEDS data, this affects approximately 45 private colleges.  Public colleges were excluded from this tax.  The tax will hit more and more private colleges over time because the formula was not indexed for inflation. 

Currently, Members of Congress use the endowment tax as a way to propose punishing private colleges and universities for a variety of reasons.  Whether it's in response to student debt relief proposals, campus protests, college costs, paying for other workforce or educational priorities, or other political motivations, there are currently a slew of legislative efforts to expand the endowment tax in different ways. 

Endowments and Higher Education

Typically, endowments consist of hundreds – and, in many cases, thousands – of individual funds provided by charitable gifts, as well as some institutional funds that are invested to support an institution’s mission in perpetuity. A significant portion of an endowment is usually legally restricted by donors for specific educational or research purposes.

At private institutions, an average of 55 percent of endowment assets were restricted. While some may mistakenly believe institutions “hide” or “hoard” money in restricted accounts to avoid spending it, colleges and universities actually prefer unrestricted donations which provide them with the greatest flexibility to use funds that best achieve their mission over time.

In 2016, the House Ways and Means Subcommittee on Oversight took the lead in sending a questionnaire to 56 private colleges and universities with endowments over $1 billion.  The letter only went to private colleges; public colleges and universities with endowments greater than $1 billion were not contacted.  Each institution receiving the questionnaire responded.   

The Endowment Tax

In September 2020, the IRS published guidance that clarified many of the confusing definitions and components of the tax.  While this guidance was helpful to the institutions paying the tax, there continues to be efforts in the higher education community to repeal it or offset taxable amounts with amounts colleges provide in institutional aid.  However, most of these efforts have so far proven unsuccessful.