Under the sweeping GOP tax plan passed in December, one particular section focusing on large colleges and universities may incentivize institutions to cease hoarding enormous endowments.
The bill includes an unprecedented 1.4 percent tax on investment income at private colleges with endowments larger than $500,000 per full-time student that enroll more than 500 students. Lawmakers expect that this will affect 35 institutions.
Many of the nation’s most prestigious universities, including Princeton, Yale, Harvard, Stanford, MIT, Dartmouth, University of Chicago, Notre Dame, Williams, and Amherst, will be affected.
Experts estimate the endowment tax will rise by about $1.8 billion in revenue over 10 years.
As of 2016, the 10 colleges with the largest endowments included Harvard ($35.7 billion), Yale ($25.4 billion), Stanford ($22.3 billion), Princeton ($21.7 billion), MIT ($13.1 billion), University of Pennsylvania ($10.7 billion), Texas A&M ($9.8 billion), University of Michigan ($9.6 billion), Columbia ($9 billion), and Notre Dame ($8.7 billion).
Though these are the largest, the median U.S. college endowment among ranked institutions was $56.7 million as of 2016.
Such enormous figures merit the question: What exactly are colleges and universities doing with their endowments?
Technically, endowments can be spent on increases in salaries for faculty and staff, research, construction of new buildings, or financial aid packages. Yet, endowment funds often flow back to the fund’s private equity fund managers, rather than to the stated beneficiaries of students, teachers, and facilities.
Victor Fleischer, a professor of law at the University of San Diego, found that in the fiscal year 2014, Yale paid about $480 million to its private equity fund managers to manage one-third of Yale’s endowment. Yale contributed $1 billion of the endowment to its operating budget, only $170 million of which went toward tuition assistance.
Fleischer argues that “private foundations are required to spend at least 5 percent of assets each year. Similarly, we should require universities to spend at least 8 percent of their endowments each year.”
Perhaps the tax bill will provide a perverse incentive for the endowment hoarding characterizing our nation’s most prestigious colleges and universities — as tuition continues to rise three times faster than inflation, the time to begin defraying it is now.
Kate Hardiman is pursuing a master's in education from Notre Dame University and teaches English and religion at a high school in Chicago.