Trump signs law hiking tax on Harvard's endowment income: Elite universities brace for financial hit

Time of India

2 days ago

Trump signs law hiking tax on Harvard's endowment income:
In a major shake-up for higher education funding in the United States, former President
Donald Trump
has signed into law a sweeping tax and spending bill that sharply increases the federal excise tax on endowment income for wealthy private universities.
The law is expected to cost Harvard University over $200 million annually, with immediate effects on its financial operations.
The legislation, titled the
'One Big Beautiful Bill'
, raises the tax on endowment investment income from 1.4% to 8% for institutions with more than $2 million in endowment assets per domestic, tuition-paying student. With over $2.9 million per student and an endowment exceeding $53 billion, Harvard is firmly in the highest tax bracket.
The tax applies only to annual investment income, which for Harvard stood at $2.5 billion in FY2024. This means a potential tax bill of $200 million or more annually — nearly five times its previous tax liability.
Elite institutions in top tax slab
Harvard is not alone. A handful of elite private universities, including Yale, Stanford, MIT, and Princeton, will also fall under the 8% tax rate. The law applies only to US-based private colleges with at least 3,000 domestic tuition-paying students, at least half of whom must be US residents.
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The bill introduces a tiered system:
8% for endowments above $2 million per student
4% for those between $750,000 and $2 million
1.4% for $500,000 to $750,000
Public institutions and smaller colleges are excluded.
Restricted endowment funds limit spending flexibility
While Harvard's endowment is vast, nearly 80% of its funds are restricted by donor agreements and legal conditions. That leaves a much smaller portion of flexible, or 'unrestricted,' funds to absorb the tax blow. These unrestricted funds are typically used for financial aid, faculty salaries, research funding, and core operations, all of which could now face cuts.
In FY2024, endowment payouts accounted for 37% of Harvard's operating revenue, making them the university's single largest source of funding.
Law passes narrowly in Congress
The legislation cleared the US House of Representatives by a 218-214 vote, with only two Republicans voting against it. It passed the Senate 51-50, with Vice President JD Vance casting the tie-breaking vote. Trump signed the bill into law during a July 4 Independence Day ceremony at the White House, calling it a long-overdue measure to hold elite universities accountable.
The final 940-page bill is part of a broader conservative agenda, including Medicare cuts, military spending increases, and bans on federal funding for Planned Parenthood and gender-affirming healthcare.
Major changes to US student loan system
In addition to the endowment tax, the legislation brings significant reforms to federal student aid:
Grad PLUS loans have been eliminated
Parent PLUS loans are now capped at $65,000 per student
Federal repayment plans will be consolidated
Key protections, including deferment for unemployment, are being removed
A new earnings-linked accountability rule will take effect from July 1, 2026, restricting federal aid to graduate programs whose alumni earn less than the median high school graduate.
Critics say these changes could reduce access to higher education, especially for low-income families.
Harvard ramps up lobbying amid political heat
Harvard has opposed endowment taxation since it was first introduced in 2017. In the first quarter of 2025, the university spent $230,000 on federal lobbying, its highest quarterly total since 2008. According to federal records, lobbying efforts focused heavily on endowment taxes, student aid, and research funding.
While university officials have not publicly responded to the new tax, they have warned in the past that such measures could undermine core academic priorities.
Conservative push to target elite schools
The push to tax elite institutions gained momentum among conservative lawmakers who argue that universities like Harvard benefit from massive, untaxed wealth while receiving federal funding and promoting political views out of step with public values.
Trump had campaigned on this issue, even proposing to create a new government-funded online 'American Academy' using proceeds from fines and taxes on wealthy universities.
An earlier version of the bill proposed a 21% top tax rate and excluded international students from endowment-per-student calculations — a change that would have pushed more institutions into higher brackets. That provision was dropped in the final Senate version following procedural objections.
Implications for Indian students and global education
Though the tax directly affects US universities, its indirect effects could ripple across the global education landscape. Harvard and other institutions may need to reassess scholarships, international outreach, and long-term academic investments — areas that have historically benefitted Indian students. Changes to the US loan system may also impact affordability for those considering graduate study in the US
As the new fiscal year begins, institutions across the country are now recalibrating their finances. For Harvard and its peers, the road ahead could include budget cuts, reallocation of unrestricted funds, and a shift in funding priorities — with ripple effects in education, research, and global collaboration.
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