Public Policy
Endowments

Current Law

Many colleges, universities and other educational institutions raise and manage endowed funds. Since educational institutions are 501(c)(3), tax-exempt public charities governed by boards, their endowments are not subject to taxation nor are they subject to an annual endowment payout requirement.


The Issue

Concerned about the rising cost of college, lawmakers have been asking questions about the investing and spending practices of college and university endowments. Some lawmakers, including Sens. Charles Grassley (R-IA), Rep. Peter Welch (D-VT) and Rep. Tom Reed (R-NY), have introduced or considered introducing legislation requiring institutions to annually payout 5 percent of the market rate of their endowed assets towards scholarships and student financial aid. In his tax reform discussion draft, former House Ways and Means Chairman Dave Camp (R-MI) proposed a 1 percent excise tax on private institution endowments with a value exceeding $100,000 per student. 

Endowment payout proponents argue that colleges and universities should be putting more of their endowments towards decreasing the cost of collage and that a payout requirement could provide more access for students. They argue that many schools are hoarding their endowment assets and point to the double-digit returns that many college and university endowments have earned during the past few years as evidence that institutions could easily manage a payout requirement.

Opponents of a payout requirement say that such a requirement would impede the ability of institutions to prudently and effectively manage endowment funds especially during economic downturns. While acknowledging that endowments have seen high returns lately, they argue that endowment investment performance must be viewed over the long term, and that institutions must balance current and future needs when determining a payout rate. Private foundations and college and universities are not comparable, according to opponents, particularly because educational institutions operate their charitable programs and must look long term when making spending decisions. Opponents also say that there is no direct connection between endowment payout and tuition rates, so a mandatory payout requirement won't solve the problem of rising college costs.


Status

Rep. Tom Reed (R-NY), a member of the Ways and Means Committee, plans to introduce legislation soon that would require college and universities with endowments over $1 billion to direct 25 percent of their annual endowment earnings towards aid for students from working class families (defined as families with income at or under 600 percent of the federal poverty level). The bill would provide an enhanced charitable deduction to donors to these institutions who make unrestricted gifts or gifts restricted to student scholarships and would limit the charitable deduction to donors who make restricted gifts to other areas to $5,000. 

President Trump has been highly critical of endowments, stating that colleges and universities with large endowments should be spending more to reduce tuition. 

Updated October 24, 2017


Resources

Updated October 24, 2017