While 11 schools, including Princeton, MIT, Yale and Harvard, were hit with a higher tax on their endowments’ investment earnings, Congress exempted wealthy small schools, including Swarthmore, Amherst, Hillsdale and CalTech, from the levy.
Strange things happen when details of a massive tax and budget bill, like the one President Donald Trump signed yesterday, are tweaked behind closed doors. Among them: A couple dozen of the nation’s wealthiest small private colleges will be getting a tax cut next year, even as bigger rich universities, including Princeton, MIT, Yale and Harvard, will be slammed with higher taxes.
It all began as an effort by House Republicans to dramatically raise the excise tax imposed on the earnings of college endowments, and particularly the endowments of wealthy “woke” schools like Harvard University that they (and President Donald Trump) have targeted.
But as it turns out, while Harvard’s tax bill will likely more than double, some smaller schools with famously left-leaning student bodies (e.g. Swarthmore College and Amherst College) are getting tax relief. That’s because schools with fewer than 3,000 full-time equivalent tuition-paying students will be exempt from the revamped endowment tax beginning next year. It currently applies to private schools with more than 500 full-time equivalent tuition-paying students and endowments worth more than $500,000 per student.
Using the latest available federal data from fiscal year 2023, Forbes identified at least 26 wealthy colleges that are likely subject to the endowment tax now, but will be exempt next year based on their size. Along with top liberal arts schools like Williams College, Wellesley College, Amherst and Swarthmore, the list includes the California Institute of Technology, a STEM powerhouse, and the Julliard School, the New York city institution known for its music, dance and drama training. Grinnell College in Iowa, which enrolled 1,790 students in 2023, will save around $2.4 million in tax each year as a result of the change, President Anne Harris said in an email to Forbes.
Here’s what happened. As passed by the House in late May, the One Big Beautiful Bill (its Trumpian name) increased the current 1.4% excise tax on college endowments’ investment earnings to as high as 21% for the richest institutions—those with endowments worth more than $2 million a student. (While these schools are all non-profits and traditionally tax exempt, the 1.4% tax on investment earnings was introduced by Trump’s big 2017 tax bill. According to Internal Revenue Service data, 56 schools paid a total of $381 million in endowment tax in calendar 2023.)
Along with raising the rate, the House voted to exempt from the tax both religiously-affiliated schools (think the University of Notre Dame) and those that don’t take federal student financial aid. (The religious exemption was structured in a way that Harvard, founded by the Puritans to train ministers, wouldn’t qualify.) The House also sought to penalize schools like Columbia University, with heavy international student enrollments, by excluding students who aren’t U.S. citizens or lawful permanent residents from the per capita calculations.
Then the bill went to the Senate, where the Finance Committee settled on more modest–albeit still stiff–rate hikes. Schools with endowments of $500,000 to $750,000 per capita would still pay at a 1.4% rate, while those with endowments above $750,000 and up to $2 million would pay 4%. Those with endowments worth more than $2 million per student would pay an 8% tax on their earnings, not the 21% passed by the House.
Enter Senate Parliamentarian Elizabeth MacDonough, who makes decisions on the Senate’s Byrd rule, which requires parts of a budget reconciliation bill like this one to have a primary purpose related to the budget—not other types of policy. The Byrd rule was put in place because reconciliation isn’t subject to filibuster. “You can’t get into a lot of prescriptive activity” in a budget reconciliation bill, explains Dean Zerbe, a national managing director for Alliantgroup, who worked on college endowment issues back when he was tax counsel for Sen. Chuck Grassley (R-Iowa). “Like, ‘you’ve got to hop on one foot,’ or ‘you’ve got to make tuition affordable,’ or ‘you’ve got to do better in terms of admission.’”
The Parliamentarian ruled that those three House provisions—exempting religious-affiliated schools, exempting schools that don’t take federal aid, and excluding foreign students from the per capita calculation—didn’t pass the Byrd test.
At that point, Republican senators settled on the 3,000-student threshold in large part to specifically exempt one school from the tax: Hillsdale College, an ultra-conservative, Christian liberal arts college in Hillsdale, Michigan and a GOP darling. It enrolled 1,794 students in 2023, had an endowment worth $584,000 per-student, and notably accepts no federal money, including student aid. (So both the religious exemption and the one for schools taking no federal student aid would have presumably shielded Hillsdale from the endowment tax—before the Parliamentarian gave them the thumbs down.)
There was also a broader group of small schools pushing for the exemption, notes Jonathan Fansmith, senior vice president for government relations and national engagement at the American Council on Education. “They made an argument that I think got some positive reception among Republican senators of saying that essentially, while their endowments may be big relative to the fact that they have small student bodies … their endowments weren’t big.” A school like Amherst, he adds, “might have a big endowment for a small school, but they don’t have a big endowment relative to the Ivies and the more heavily resourced [universities].”
House Republicans, under intense pressure to meet Trump’s July 4th deadline, ended up accepting the final Senate product in full. That meant exempting the smaller schools, including the “woke” ones, while levying a rate of up to 8% on the endowments of bigger schools. Congress’ Joint Committee on Taxation estimates colleges will now pay an extra $761 million in tax over 10 years, compared to the extra $6.7 billion they would have paid under the House version with its higher 21% rate and broader reach.
Based on data from 2023, Forbes estimates that at least 11 universities will have their endowment earnings taxed at an 8% or 4% rate in 2026, while five will continue to pay the 1.4% rate.
Three schools—Princeton University, Yale University, and the Massachusetts Institute of Technology—will likely be required to pay an 8% excise tax on their endowment earnings. Another eight, including Harvard, Stanford University, Dartmouth College and Vanderbilt University, will likely pay a 4% tax. The remaining five schools—Emory University, Duke University, Washington University in St Louis, the University of Pennsylvania, and Brown University—would pay the same 1.4% endowment tax rate they’re paying now, based on fiscal 2023 numbers.
One school that will likely pay 4% is the University of Notre Dame, a Catholic-affiliated school which would have been exempt from the tax were it not for the Byrd rule. “We are deeply disappointed by the removal of language protecting religious institutions of higher education from the endowment tax before passage of the final bill,” Notre Dame wrote in a statement to Forbes. “Any expansion of the endowment tax threatens to undermine the ability of a broad range of faith-based institutions to serve their religious purpose. We are proud to have stood with a coalition of these institutions against that threat, and we are encouraged by the strong support for a religious exemption received from both chambers.”
Fansmith, for his part, won’t call the exemption of the small schools a win. “We think the tax is a bad idea and it’s bad policy, and no schools should be paying it. But, by the standard that fewer schools are paying, it’s better, but it’s still not good,” he says. “It’s not really about revenue,” adds Fansmith. “It’s really about punishing these schools that right now a segment of the Republican party doesn’t like.” The schools make the argument that it’s students who are being punished, since around half of endowment spending pays for student scholarships.
Meanwhile, Zerbe warns the now exempt schools shouldn’t take that status for granted. “Once revenue raisers are in play and out there, they come back again and again,” he says. “It would be a disaster for [colleges] to think somehow this was a win for them. This was a billion dollar hit on them and there’s more to come later.”
