About

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 about $31.5 million, compared to $28.9 million at public colleges. (FY 2015 – 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) impose a new tax on the endowments of private colleges.

In fact, the Tax Cuts and Jobs Act of 2017 (TCJA) imposed a new 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 will affect approximately 28 private colleges.  Public colleges were excluded from this new tax.

Neither the Treasury Department nor the IRS has issued guidance on how the tax will be assessed or collected, or which funds will be exempt from the tax because of a yet undefined exclusion for funds used toward an institution’s exempt purpose.
 

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 successfully responded.  

Shortly after the new endowment tax became law, and while private colleges await further guidance, there was already bipartisan interest in Congress to repeal it.
 
In addition, the colleges and universities that will be hit with this new tax – as well as those close to being swept into the formula – sent a letter to the Hill asking for the repeal of the tax, or at least relief from its impact.