Penn, Bryn Mawr, Swarthmore warn increases in the endowment tax could harm financial aid, other programs

Colleges have seen their research funding and grants targeted by President Donald Trump’s administration.

Next up, the wealthiest colleges in the country are bracing for a potential increase in the tax on their endowment earnings.

The tax was enacted by Congress in 2017 during Trump’s first term as president, and proposals have been circulating to expand it to more colleges and increase the levy.

Locally, only the University of Pennsylvania, Swarthmore College, Bryn Mawr College, and Princeton University — which has the largest endowment of the four at $34.1 billion — pay the 1.4% excise tax. They meet the current threshold of having at least 500 tuition-paying students and an endowment that is larger than $500,000 per student. (Public colleges are exempt.)

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But some proposals would lower that threshold so that more colleges would qualify and raise the tax to as much as 35%, though those watching closely think somewhere between 14% and 21% is more likely.

That could mean colleges would have to pay many millions more in taxes from funds that they use to support financial aid for students, research, endowed professorships, and other programs. At Swarthmore, for example, endowment earnings fund more than half of the operating budget. The school has a $2.7 billion endowment and pays $2 million in annual taxes at the 1.4% rate.

“An increase could have significant implications for Swarthmore’s finances,” president Valerie Smith said in a message to the campus community this week. “… We are working with a coalition of similar institutions and talking with lawmakers and their staff members to minimize any adverse impact the legislation may have on Swarthmore.”

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Here is what to know about endowments, the tax, proposed changes, and the impact they would have.

Endowments are money or investment assets that largely come from donors, though there can be other sources of funding, too.

Princeton president Christopher Eisgruber in his campus message in January likened an endowment to “a retirement annuity that must provide income every year for the remainder of the owner’s life.”

No. Endowments cannot be spent freely. Much of the money is restricted for specific purposes in legal agreements with donors. At Penn, which has a $22.3 billion endowment, about 90% of the 8,400 individual funds are restricted.

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“That is why neither our university nor others can simply ‘dip into the endowment’ to pay for new initiatives,” Princeton’s Eisgruber said. “… indeed, the gifts that create endowed funds almost always stipulate that they must be drawn down every year to support scholarships, professorships, or some other designated purpose.”

Endowments are considered charitable assets and are governed by state law in Pennsylvania.

The average spend rate last year was 4.8%, according to the National Association of College and University Business Officers. Penn last year spent 5%, or $1.1 billion.

It varies. At Penn, it amounts to 20% of the school’s annual academic operating budget. At Swarthmore College, it’s more than half the overall budget. At Bryn Mawr, a women’s college that has an endowment of $1.2 billion, it covers 35% to 40% of the budget.

On average, nearly half of endowment spending funds financial aid, according to the business officers association. Endowed faculty positions, campus maintenance, and academic programs and research are among other uses.

Congress in 2017 enacted the endowment tax as critics eyed the large endowments of some universities, which also carry high price tags for students. The Trump administration also saw the tax as a way to pay for other federal tax cuts, which may again be driving the decision to raise it. The tax is on realized investment gains.

Universities largely enjoy tax-exempt status. Local community groups in Philadelphia repeatedly have called on universities, particularly Penn, to make payments in lieu of taxes, or PILOTs, to the city to help its struggling schools. Penn announced in 2020 it would donate $100 million over 10 years to the Philadelphia School District to remediate environmental hazards, including asbestos and lead.

Current tax amounts vary based on the size of schools’ endowments and other investments and the returns they earned in a given year. Penn anticipates paying $10.4 million for fiscal year 2024.

One Republican proposal that surfaced earlier this year would increase the rate to 14%, raising an estimated $10 billion in additional revenue over a decade, according to the Chronicle of Higher Education.

Others guess the new rate might be closer to 21%, matching the corporate tax rate.

U.S. Reps. Dave Joyce (R., Ohio) and Nicole Malliotakis (R., N.Y.) have proposed tying the tax increase to how much universities increase tuition. Universities that raise tuition more than the rate of inflation would be required to pay 20%. Others would pay 10%.

“It is past time to hold these institutions accountable,” Joyce told the Chronicle.

Currently, more than 50 colleges pay the endowment tax, but some proposals to change the criteria might draw in more.

The largest increase floated was by Vice President JD Vance, who, when he was a U.S. senator, proposed increasing the tax to 35% for colleges with endowments of $10 billion or more.

Congress is expected to consider changes this year during budget negotiations.

“If enacted, some of the proposed endowment tax increases will undoubtedly diminish the ability of many colleges and universities to support students further, particularly those with financial needs, in addition to middle-class families, faculty, and the community,” said Wendy Cadge, president of Bryn Mawr College. “… Without the endowment’s growth and the associated growth of its annual distributions to the college, we wouldn’t be able to increase the amount of grant-based aid we can extend to our students who cannot afford a Bryn Mawr education or be able to raise tuition very slowly even for those who pay full tuition.”

Tuition and fees at Bryn Mawr run nearly $66,000 annually, though many receive the college’s financial aid and the school notes it meets the demonstrated need of all its students.

Penn’s tuition and fees will run $71,236 next year; total costs with room and board will top $91,000. But the school’s average financial aid package this year was $70,552, more than three-quarters the cost of attendance.

If the 14% tax were enacted, Penn would pay about $104 million on the current year’s investment income. The university also faces $250 million in cuts to research funding from the National Institutes of Health, and the Trump administration recently paused about $175 million in funding to the university because it allowed transgender swimmer Lia Thomas to compete on the women’s team in 2021-22.

In an article on its website about the endowment, Penn said that a combined $500 million cut in research funding and endowment tax cost could over a decade “deplete the purchasing power of Penn’s endowment by 30%.”

“That means a scholarship fund would only be able to cover 70% of a full scholarship a decade later,” Mark Dingfield, vice president for finance and treasurer, said in the piece.

Swarthmore College says its endowment allows the school to “meet the full demonstrated financial need” of all its students. This year, the college doled out more than $60 million in aid to more than 900 students, spokesperson Alisa Giardinelli said.

“Any increase to the tax threatens to limit our ability to financially support our students and erode our ability to fulfill our mission,” she said.