Small private colleges are working together to lobby against the sweeping budget bill making its way through Congress that would hike taxes on endowments and land with particular force on their institutions.
That’s because, unlike some of the major research universities that would also be taxed at higher rates, endowment returns can account for the bulk of annual operating revenues for small private colleges, which represent nearly half of the institutions that could be taxed at the three highest rates proposed in legislation that recently passed the House and has made its way into the Senate.
“Endowments are our primary source of revenue,” said Anne F. Harris, president of Grinnell College, which is facing a potential 21-percent tax, she said. “We don’t have a D-I athletic team. We don’t have a medical center. We don’t have billions of dollars of grants.”
The proposed endowment tax builds off of the 2017 Tax Cuts and Jobs Act, which instituted a 1.4-percent tax on net investment returns on private nonprofit colleges that enrolled over 500 students and had endowments of over $500,000 per student.
The new bill would sort colleges into a four-tiered system according to a “student-adjusted endowment” — calculated by dividing endowment assets by the number of domestic students. Those with a student-adjusted endowment above $2 million would pay 21 percent. That rate drops to 14 percent for colleges with a ratio of $1.25 million to $2 million, 7 percent for colleges at $750,000 to $1.25 million, and 1.4 percent for colleges at $500,000 to $750,000.
The calculation excludes international students, which would place into these tiers institutions like Columbia University and the University of Pennsylvania, which have been in the Trump administration’s crosshairs. Columbia stands to pay a 1.4-percent tax, while Penn is estimated to pay a 7-percent tax, according to The Chronicle’s projections.
While the proposed policy would affect a very narrow slice of the nation’s very selective institutions, leaders of such colleges argue that the bill may end up working against other stated objectives of Congress, like improving access to and the affordability of their institutions. Of the 31 colleges, excluding medical schools, that would potentially fall into the top three tax tiers, 14 are small liberal-arts colleges, according to The Chronicle’s analysis, which is based on endowment returns for fiscal year 2023. Depending on their endowments’ performance in the next fiscal year, some colleges could be propelled into higher or lower tiers, and more colleges could be added to the list.
Leaders of many of these small colleges say that if they are forced to reallocate millions more dollars in endowment returns to the U.S. Treasury, that would mean less money available for their basic operations, financial aid, need-blind admissions policies, and community-facing programs — areas that they say benefit students, by making college more affordable, and the wider community, by putting money into local programs and institutions.
Endowment revenues contributed to 49 percent of Pomona College’s annual operating budget. And 60 percent of Grinnell’s operating budget comes from endowment revenues. At Swarthmore College, 57.6 percent of its 2024-25 revenues came from endowment spending.
“So it’s a pretty simple story,” said Rob Goldberg, vice president for finance and administration at Swarthmore. “A tax that gets at the guts of your revenue is going to be pretty impactful.”
A Blow to Financial Aid
For many small colleges, the impact of an increased endowment tax will be felt most heavily in its ability to provide institutional aid.
These institutions spend the majority of their endowment returns on their financial-aid programs, putting them above the national average of 48.1 percent, according to a 2024 survey of 645 college respondents by the National Association of College and University Business Officers.
The thing that we’re the most worried about is if the Congress wants to limit student debt and reliance on federal loans, this could have the opposite effect of that.
At Pomona, 60 percent of the financial-aid budget comes from its endowment, according to Robert Gaines, its acting president. This money helps Pomona maintain its need-blind admissions policy and commitment to meeting admitted students’ full demonstrated need. If the tax were to pass, these policies “would be severely compromised,” he said.
Over half of Swarthmore’s student body receives financial aid, with an average award of $72,000. The total cost of attendance for the 2024-25 academic year was $88,696, according to federal data.
“If we had to absorb an endowment tax of this magnitude, we have to revisit that program,” Goldberg said. “I just don’t think there’s any other way around it.”
At Smith College, about two-thirds of the student body receives financial aid, which is largely financed through endowment interest. David DeSwert, executive vice president for finance and administration, wrote in a statement to The Chronicle that the college is “extremely concerned” about possible effects on accessibility for the low-income students it enrolls. Eighteen percent of its students receive Pell Grants, according to federal data.
Eleven of the 14 small liberal-arts colleges that could find themselves in the top three tax tiers practice need-blind admissions for domestic students, meaning that applicants are admitted without considering their ability to pay tuition. These 11 colleges also seek to meet students’ full demonstrated need. Nine of those colleges also commit to a no-loans aid program.
Bryn Mawr College, which, along with Smith and McPherson Colleges, doesn’t practice need-blind admissions, has worked to flatten or decrease the cost of attendance for low- and middle-income families over the past five years. A potential 7-percent tax on endowment earnings would not only hinder those efforts but have “the potential to impact nearly every aspect of the operations at every college it applies to,” Wendy Cadge, Bryn Mawr’s president, wrote in a statement to The Chronicle.
Large research universities are also steeling themselves against negative impacts to their financial-aid programs. For example, Princeton University, which would be among those taxed at the 21-percent level, relies heavily on endowment returns, which make up 55 percent of its nearly $3-billion annual operating budget. Over half of its annual endowment spending goes toward financial aid.
For Washington and Lee University, in Virginia, which currently pays the 1.4-percent tax rate and would face an increase to 7 percent, a tax hike would be equivalent to 200 scholarships, according to Will Dudley, the institution’s president.
The increased tax would affect Wellesley College on several fronts, according to Stacey Schmeidel, the college’s spokesperson. Endowment returns make up the largest portion of its operating budget, at 43 percent. That money helps support its financial-aid program, which supports 55 percent of the student body. If the college were to pay a 14-percent tax, or an approximately $30-million tax liability each year, that would be equal to fully funding 325 students. About one in five students at Wellesley receive Pell Grants.
“Essentially, it is a tax on the students who most need aid,” Schmeidel wrote in a statement. She also warned that increasing the endowment tax could hurt Wellesley’s ability to “hire and retain faculty.”
Other endowment-reliant small colleges are bracing for potential impacts to their basic operations. For Swarthmore, endowment funds drive the “day-to-day upkeep of our facilities,” Goldberg said. Amherst, Pomona, and Wellesley Colleges have all warned in public statements that their campuses’ operations would be hurt by an increased endowment tax.
‘Economic Engine’
Endowment returns can also finance projects that benefit the communities in which small colleges are located, say several of their leaders. That includes grants to local hospitals, college-subsidized public-transportation passes, and dining-plan programs that substitute meal swipes with money that can be spent at local restaurants.
These colleges, which tend to be in rural areas, are also often critical contributors to their local and state economies. Williams College is one of the largest employers in its town, Willamstown, Mass., with 1,322 permanent employees, whose wages “outpace the median for our area,” according to Maud S. Mandel, the college’s president.
Goldberg described Swarthmore as “an economic engine for our local region and for the state.”
For example, Swarthmore’s “dining dollar” program, which pays for student meal plans that can be used at local restaurants and stores, adds “about a million dollars a year into the village economy,” according to Goldberg. Swarthmore also gives students free public-transportation passes that subsidize and encourage students to get off campus into the Philadelphia area.
The tax, said Goldberg, “has second- and third-order effects that I don’t know if people really understand.”
Grinnell taps its endowment returns to pay for efforts that benefit the wider community. It awards grants that go toward supporting the town’s priorities, including the maternity ward at the local hospital, building an accessible playground, and supporting the Grinnell Historical Museum.
These benefits are among the examples Grinnell is highlighting as it appeals to lawmakers to stop the legislation from continuing in its current form. Harris said that she has been in contact with Sen. Charles Grassley, a Republican of Iowa, and spoken with his tax expert.
In her conversations with them, Harris said, she emphasized the potential impacts of an endowment tax and how they would be felt by “our incredibly diverse ecosystem in higher education.”
“We are not all the same, right? There are research institutions, there are regional publics, there are these small liberal-arts colleges,” Harris said. “As high as the stakes are, these have been really wonderful conversations as people realize, ‘Oh OK, this is what’s going on. Like, this is your financial model.’”
Banding Together
These are the types of arguments small colleges are making as they engage in a joint lobbying effort against the proposed tax.
Goldberg, of Swarthmore, said that the more than 20 institutions in the “Small Colleges Coalition” are united by their “similar financial structures,” meaning that they share a “much higher reliance on endowments than bigger schools, and we have far less reliance on federal funding than bigger schools.”
Some of the ideas being floated include having a different tax rate for colleges that enroll fewer than 5,000 students, or giving tax breaks to colleges that report high graduation rates and low student indebtedness, according to Politico.
The budget bill’s endowment-tax provisions appear to be generating some skepticism in the Senate. Sen. James Lankford, a Republican of Oklahoma who serves on the Senate Committee on Finance, told Politico that he wants to dial back the endowment-tax hike, though he did not discuss specifics.
College leaders are also warning that increasing the endowment tax would run headlong into a stated aim of the Republican lawmakers spearheading this legislation: making college less expensive.
At Swarthmore, Goldberg cautioned that “the thing that we’re the most worried about is if the Congress wants to limit student debt and reliance on federal loans, this could have the opposite effect of that.” In addition to hiking endowment taxes, the budget bill proposes limiting Pell Grant eligibility, capping some student loans, and mandating that colleges pay back portions of debt accrued by students who default on their loans.
Senate Republicans on Tuesday released their own version of a reconciliation bill that does not include the same credit-hour restrictions that are proposed in the version passed in the House.
“It could force schools like us that are no-loan into a situation where we would have to provide less aid, and then students would have to take out loans to make up the difference and then thus graduate with higher debt,” Goldberg said. “I don’t think that’s what the Congress intends.”
Rep. Jason Smith, a Republican of Missouri and chair of the Ways and Means Committee, said in a statement that the legislation is meant to tax colleges like corporations. He alleged that wealthy colleges are “often failing to use their endowments to enhance student services, experiences, and quality of education on campus.”
But that’s what the leaders of this group of small colleges say they’re already doing. “We are doing what we are hearing the American public say they want small liberal-arts colleges to do: provide college access, have reliable and effective outcomes for our students, and be a public good,” said Harris, of Grinnell. “We want to be a good neighbor, and I’m trying to make the case that we are.”
