Anxiety among institutions of higher learning is high as cuts to education spending and tax hikes are being floated by government officials across the nation. While institutions face an onslaught at both the state and federal level, the largest danger to the long-term health of private higher education are efforts in Congress to tax college and university endowments. Wabash could face significant financial losses if Congress extends and expands the current endowment excise tax.
The endowment tax is not new, nor is it a standalone measure. In 2017 during President Donald Trump’s first term, Congress passed the Tax Cuts and Jobs Act. The Act was perhaps the largest tax overhaul in decades, and, among other functions, cut the corporate tax rate and increased standard deductions and family tax credits. To recoup some of the income from the Tax Cuts and Jobs Act’s tax cuts, Congress included in the legislation an “endowment tax,” a 1.4% excise tax on private universities that have at least 500 tuition-paying students, more than 50% of whom are located in the United States, and assets with a fair market value of $500,000 or greater per student.
In 2023, around 60 colleges and universities paid the endowment tax, altogether generating about $380 million.
“Endowment” tax is also something of a misnomer, as the tax doesn’t only apply to an institution’s endowment.
“An important thing that people don’t understand is that it isn’t just our pooled endowment that’s included in the calculation for the tax,” said Kendra Cooks, chief financial officer and treasurer at Wabash. “It includes pooled endowments and the value of any investment assets that we have, including trusts.”
The tax was meant to be a slap across the face of elite, wealthy institutions of higher learning from Republican lawmakers who, taking signals from President Trump, are increasingly hostile toward such schools because they are viewed as breeding grounds for “wokeness” and liberal extremism. But moves from politicians could put other institutions like Wabash in the tax’s crosshairs.
The Tax Cuts and Jobs Act is set to expire on December 31 of this year, reverting the tax code back to pre-2017 status and eliminating the endowment tax. However, Republican lawmakers are looking to extend the act through 2034. House Ways and Means Committee Chairman Jason Smith (R-Mo.) floated the idea in a committee meeting back in January. Additionally, bills have been introduced that would raise the endowment tax to 10% or even 20% of an institution’s revenue from its assets. Other bills promote lowering the $500,000 per student threshold down to $250,000, a move that would bring many more schools under the endowment tax. GOP lawmakers are employing budget reconciliation — a method of fast tracking certain budgetary measures that requires bills to pass the Senate with a simple majority and not the customary 60 member majority — to accomplish their goals in this area.
Currently, Wabash does not pay the endowment tax. But the College is not lightyears away from the threshold. Indeed, if the stock market had not taken a tumble in January and February, the College’s endowment would have been almost valuable enough to reach the $500,000 per student mark.
“The value of our endowment was about $423 million at the end of December,” said Cooks. “That gave us an endowment per student of $488,000. If we had $17.2 million more in growth, which I projected we would have had before the stock market’s downturn, we would have hit that threshold by the end of this fiscal year.”
Assets totaling at least $500,000 per student is not the only requirement for the endowment tax. Institutions must have at least 500 tuition-paying students. For most schools, having that number is a given. But because Wabash only enrolls 868 students, admits many students who qualify for large financial aid packages and provides many scholarships itself, only about 480 students currently pay any amount of money in tuition at Wabash. Therefore, only those 480 are counted as tuition-paying students and not all 868 enrolled students.
“Tuition-paying means the value of our tuition minus scholarships that the institution provides, federal and state grants and federal work study or WISE money, as we call it,” said Cooks. “Outside scholarships are not included in that.”
While the College will not have to pay the tax this year, if the Tax Cuts and Jobs Act is extended and no exemptions are granted, Wabash’s assets will eventually crest the $500,000 per student mark. After that bridge is crossed there is really no return. However, the College can still rely on having fewer than 500 students who pay tuition. That safety net is in serious danger. The senior class is smaller than average this year, meaning enrollment will likely be higher next year. Additionally, budgetary cuts to state and federal student aid programs, like Pell Grants or the Frank O’Bannon Grants, means more students and their families would have to pay tuition out of pocket. These factors would force the number of tuition paying students over 500.
The College does have a short term option if it reaches the threshold to pay the 1.4% tax. To prevent more than 500 students from paying tuition, the College could offer more financial aid to students so that there are never 500 students paying tuition. But that arrangement would be a short term fix because Wabash already dishes out significant financial aid. So how much would Wabash pay if it meets the criteria in a few years?
“It really depends on the year,” said Cooks. “But I would estimate in that first year somewhere in the $400,000 to $600,000 range at 1.4%. The 1.4% is annoying and really will impact us, but I finally got us to break even. But an increase to a 10% or 20% rate would be really, really hard for us.”
Simply put, an increase of the endowment tax without the inclusion of an exemption that Wabash qualified for would be a catastrophic blow to the sustainability of the College. Even paying the tax at its current rate would require difficult decisions for administrators.
“We have kept other operational budget lines, including maintenance and upkeep of our facilities, to quite conservative levels for a number of years so there is just very little flexibility remaining in our budget,” said Wabash President Scott Feller.
In light of the extremely high stakes, College officials are working to lobby lawmakers so that institutions like Wabash are exempted from paying the tax. They want to tell Wabash’s story and differentiate it from the wealthy schools that initially drew the wrath of Republican politicians. The College earns around $20 million a year from its endowment and one-off gifts, but Wabash actually provides more than $20 million in financial aid each year. In fact, only $16 million of the College’s approximately $50 million yearly operating budget is revenue from students. More so than most other institutions which currently pay or could pay the tax in the near future, Wabash uses more than the value of its entire endowment revenue to provide financial aid to students.
“We’re trying to really work hard to educate the Internal Revenue Service, to educate legislators, to use some of our Wabash alumni that are in really great positions to help us and help rule-makers understand,” said Cooks. “This tax was intended for an Ivy. We are not the kind of college or university this tax was intended to impact.”
While Wabash’s administrators and their allies have been putting in significant work to protect Wabash from the endowment tax by meeting with government officials and advocating for the College to committees and agencies, the future remains cloudy.
“Given the high level of uncertainty in Washington I think it is much too early to say how things will turn out,” said Feller. “Success in convincing policy makers that increasing the endowment tax on colleges and universities generally, or that small undergraduate colleges like Wabash should be exempted, is not assured.”
The threat of the endowment tax — and the havoc that would result from an increase to it — is one of the dangers on the minds of private higher education administrators across the country. The action will pick up as the year goes on and Congress approaches the December 31 deadline to extend the Tax Cuts and Jobs Act. In the meantime, concerned administrators and their teams will continue to advocate for their schools’ survival.