Public Policy
Endowments

New Law

Under the new tax law, there is a 1.4 percent excise tax on net investment income for private colleges and universities with:

  • over 500 students (FTE),
  • where more than 50 percent of the tuition paying students are located in the United States, and
  • with an aggregate fair market value of assets of which at the end of the preceding taxable year (other than those assets which are used directly in carrying out the institution's exempt purpose) is at least $500,000 per student of the institutions.

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.

The Tax Cuts and Jobs Act passed in 2017 and included an excise tax on certain private colleges' and universities' endowments.


Impact on Education institutions

This misguided tax will result in fewer funds for scholarships, research, and academic programs. Instead of bringing down college costs, this tax does the opposite. College and university endowment funds are an important source of revenue which support student financial aid, teaching, research, and public service missions.  The new law is redirecting charitable funds away from these purposes and discouraging donor generosity.


CASE Position

CASE supports the Don't Tax Higher Education Act (H.R. 5220) which was introduced by Representatives John Delaney (D-MD) and Bradley Byrne (R-AL). This bill would repeal the 1.4 percent endowment excise tax.

CASE opposes the Reducing Excessive Debt and Unfair Costs of Education (REDUCE) Act (H.R. 5916), recently introduced by Representative Tom Reed (R-NY). This bill would require certain colleges and universities to direct 25% of their endowment investment gains to support working class families or face tax penalties. Read CASE's summary of the bill here.

To stay updated on the latest endowments news and developments, please visit the CASE Advocacy Action Center and subscribe to the CASE Advocacy Network.


Resources

Updated June 8, 2018