What the Reconciliation Bill Means for University Endowments and Why It Matters
A shift is coming to the way private colleges and universities are taxed on their endowments. In recently passed federal legislation, dubbed the “Big Beautiful Bill,” are updated rules that expand and restructure the endowment tax which was first introduced in 2017. The new framework is expected to increase tax burdens on wealthy institutions and could have long-term implications for how colleges and universities fund scholarships, research, and student services.
Here’s what you need to know about the changes, who is impacted, and why some are raising concerns.
The 2017 Endowment Tax
The endowment tax was first introduced as part of the Tax Cuts and Jobs Act of 2017. That law imposed a 1.4% tax on certain private colleges and universities with:
- Endowments of at least $500,000 per full-time student, and
- At least 500 full-time students,
With more than 50% of tuition-paying students located in the U.S.
In 2023, this tax applied to 56 institutions, including major names like Harvard, Yale, and Brown, generating around $380 million in tax revenue.
Changes coming in 2026
The newly passed legislation revises the tax structure significantly, replacing the flat 1.4% rate with a bracketed system that increases the tax as the per-student endowment grows. The new system, effective in 2026, introduces these tiers:
- $500K–$750K per student: 1.4% tax (same as before)
- $750K–$2 million per student: 4% tax
- Over $2 million per student: 8% tax
To determine these levels, the law uses a concept called “student-adjusted endowment” which is the institution’s endowment divided by its number of eligible full-time students (those located in the U.S. and paying tuition). This method ensures the tax is based on per-student resources rather than overall wealth.
Key Concerns for Colleges and Universities
While the new system is designed to collect more tax revenue from wealthy institutions (an estimated $761 million over the next 10 years), there are several potential challenges universities will need to navigate:
- Reduced Funding for Financial Aid - Endowment income is a major funding source for need-based scholarships and grants. At many institutions, these funds directly support lower-income and first-generation students. A higher tax rate means less money available for this critical aid.
- Constraints on Long-Term Planning- Universities rely on endowments not just for student aid, but for faculty salaries, research funding, infrastructure projects, and long-term capital planning. A multi-tiered tax introduces budget uncertainty, especially for institutions close to a threshold.
- Disincentive to Grow Endowments - The bracketed system could unintentionally discourage institutions from growing their endowments beyond certain per-student limits. Schools may become more cautious with fundraising, investment strategies, or even enrollment decisions to avoid tipping into a higher tax bracket.
Final Thoughts
The new endowment tax brackets represent a shift toward more progressive taxation of institutional wealth in higher education. The intent is to ensure that the most financially robust schools contribute more. However, it also introduces complexity and could create unintended pressure on institutions that depend on endowment income to support broad access, affordability, and innovation.
While the policy’s full impact will take years to measure, it’s clear that colleges and universities will face new challenges in how they plan, spend, and grow their endowment funds.
Key Takeaways:
- The 1.4% flat endowment tax is being replaced in 2026 with a tiered system up to 8%.
- Tax applies to private colleges and universities with 3,000+ full-time students and endowments over $500K/student.
- Institutions may face constraints on financial aid, research, and strategic investments.
- Estimated to raise $761 million in tax revenue over 10 years.