Issue Briefs

About

Endowments are necessary to maintain quality and excellence in American higher education. For more than 350 years, endowments have supported the mission of colleges and universities by providing funding to assist students; hire faculty; conduct research; construct facilities; and carry out other educational activities that would not have been possible if institutions had to rely solely on tuition, direct private philanthropy, or government funding.

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 $49.6 million, just slightly more than the median public college endowment of $47.8 million (FY 2024 IPEDS).

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% of endowment assets are 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 that provide them with the greatest flexibility to use funds that best achieve their mission over time.

The Endowment Tax

The Tax Cuts and Jobs Act of 2017 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. Public colleges were excluded from this tax. The tax initially impacted about 30 private colleges but hit more institutions 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, private college endowments continue to be a popular political target.

In 2025, the One Big Beautiful Bill Act changed the formula for assessing the tax and increased rates on several private institutions. The bill implemented a three-tier rate structure of 1.4%, 4%, and 8% as determined by assets per student, but substantially narrowed the pool of affected institutions by increasing the student-enrollment threshold amount to be subject to the tax from 500 to 3,000 tuition-paying students.