Elite private universities, such as Yale, Harvard, and Princeton, have been lobbying for Senate Democrats to eliminate the tax on endowments, which these colleges claim hinders their ability to help college students financially when, in reality, it aids that.
The 1.4% endowment tax, which raises about $200 million per year, “is unprecedented and damaging to the teaching and research mission of the affected institutions,” Ted Mitchell, president of the American Council on Education, wrote to the Senate Finance Committee. “This tax takes money directly away from teaching, research, student financial aid and support services, and countless other mission-focused activities.”
The Tax Cut and Jobs Act, passed in 2017, imposes the tax on net investment income for colleges with endowments larger than $500,000 per student, Inside Higher Ed reports.
“The rationale behind this change was mainly to generate additional federal revenues and promote university endowments to support additional spending on tuition for students,” Hayley Wood, a wealth planner at Signature Estate & Investment Advisors, told Business Insider. “Thus, this could help offset the growing national student debt concerns.”
In other words, the tax is designed to get colleges with massive endowments to stop hoarding money while constantly increasing tuition and instead start using the gains for actual educational purposes.
Since a majority of these well-endowed colleges have generous donors, they don’t want the restrictions this tax brings. The institutions make the argument that the taxes intercept aid they would otherwise give to low-income students. But, in reality, the aid is the whole point. The tax encourages these universities to spend on students. Currently, their endowments contribute a small amount to financial aid.
Elite institutions give financial aid to a significantly smaller share of their students, according to American Council on Education. Private schools with billion-dollar endowments give aid to 63%, compared to the national private four-year average. And the top 10 (56%) and top 25 (54%) four-year schools help out even fewer students.
If Congress were to approve this tax cut, it’s not as if Harvard would start granting all its students full rides. No one attends these prestigious institutions without either having a financial plan or launching into a career that will allow them to pay off student loans — you don’t go to Harvard for the heck of it.
Higher education communities want to get rid of the endowment tax because they feel that money could be used for greater things. When compared to how much money they pull in from endowment funds, the tax really is not a big issue. For example, it was reported in 2021 that Harvard’s endowment was $53.2 billion. Since Harvard has the largest endowment in the country, the tax really is not the issue. It may just be the way universities are hoarding these finances rather than utilizing them to help students.
The good news? “No current member of Congress is seriously considering a cut on taxes, especially on wealthy institutions,” Charles Skorina, an investment executive recruiter, told Yale Daily News.
For all of their complaining, university administrators have one really easy way to avoid this tax: spend all of the gains in your endowment on students and programs. Maybe even pay off your students’ loans. Are you an actual educational institution or a wealth hoarder?
Esther Wickham is a summer 2022 Washington Examiner fellow.
