President Trump has proposed to raise the tax on university endowment returns from 1.4% to as high as 21%, causing debate across higher education. This move, part of a broader budget bill, targets private universities with substantial endowments, such as Harvard, Yale, and Stanford. If enacted, the policy could reduce the flow of institutional capital into financial markets, shift university investment behavior, and constrain access to education for lower-income students.
University endowments collectively manage over $840 billion in assets, making them among the largest and most influential institutional investors in the U.S. economy. Much of this is actively invested across asset classes like private equity, venture capital, real estate, infrastructure, and municipal bonds. These funds typically support student financial aid, academic research, and faculty salaries. The proposed tax hike would significantly reduce the after-tax returns on these investments, prompting institutions to reconsider their portfolios.
Universities may begin favoring more tax-efficient but potentially less impactful assets. This creates a structural incentive for universities to shift toward more tax-efficient but potentially less impactful strategies, such as ETFs, short-term Treasuries, or real assets. Some schools may adopt deferred revenue structures or limit realized gains to reduce taxable exposure. This would lead to a potential withdrawal of capital from segments of the market that historically rely on long-horizon institutional funding, such as early-stage startups, sustainable energy, and public infrastructure.
For myself, a student at a mid-sized research institution like the University of Rochester, which competes with wealthier peers such as Vassar and Bowdoin, the proposed tax could feel like an equalizer. Schools with large per-student endowments enjoy substantial advantages in financial aid, faculty hiring, and campus resources. A higher tax on their investment returns could narrow that gap, subtly leveling the playing field for schools with smaller endowments. At the same time, if the policy discourages philanthropic giving or sets a broader precedent for taxing nonprofit investment income, it could eventually constrain schools like Rochester as well. The future impact may hinge less on who is taxed today and more on how institutional capital is treated across the sector going forward.