Tax Changes Favor Some Wealthy Schools Over Others

The recent tax bill signed into law has some surprising twists for private colleges. While big names like Princeton, MIT, and Harvard will see higher taxes on their endowment earnings, smaller schools with significant wealth are getting a break. This shift comes from a change in the rules that now exempts schools with fewer than 3, 000 students from the endowment tax. The original plan was to increase the tax rate on endowment earnings for wealthy schools, but the final version of the bill ended up benefiting some smaller, equally wealthy institutions. Schools like Swarthmore, Amherst, and CalTech, which are known for their liberal student bodies, will now avoid paying the tax. This exemption is likely to save these schools millions of dollars each year. The tax on endowment earnings was first introduced in 2017 as part of a broader tax reform. Initially, it applied to private schools with endowments worth more than $500, 000 per student. The new bill raises the tax rate for schools with larger endowments, but the exemption for smaller schools changes the game. Some argue that this exemption is a way to protect certain institutions that align with specific political views. For example, Hillsdale College, a conservative Christian school, is one of the beneficiaries of this change. The exemption was partly designed to shield schools like Hillsdale from the tax, even though they have substantial endowments. Critics of the tax argue that it unfairly targets universities and could hurt students who rely on financial aid funded by endowment earnings. Supporters, however, see it as a way to ensure that wealthy institutions contribute more to the public good. The final version of the bill also includes higher tax rates for larger schools. For example, Princeton, Yale, and MIT will now pay an 8% tax on their endowment earnings, while Harvard and Stanford will pay 4%. This change is expected to bring in an extra $761 million over the next decade, though it’s far less than the $6. 7 billion that would have been collected under the original plan. Some schools, like Notre Dame, are disappointed that the exemption for religious institutions was removed. They argue that the tax could limit their ability to serve their religious mission. Others, like the American Council on Education, believe the tax is a bad idea overall and that no schools should be paying it. The exemption for smaller schools might not last forever. Tax experts warn that once a new tax is introduced, it often comes back in future legislation. So while these schools are enjoying a break now, they shouldn’t expect it to last.