‘Big Beautiful Bill’ will raise the cost of college
First published by the Boston Globe
Most of the debate about the “One Big Beautiful Bill” making its way through Congress has been about individual tax cuts and changes to Medicaid. But buried within the massive bill is a far-reaching provision that deserves greater consideration, since it is likely to raise the cost of a college education and hurt US competitiveness.
This provision would drastically increase the excise tax on income from the largest college and university endowments. Endowments are the accumulated gifts of many generations of donors, often alumni, who intend for subsequent generations of students to have the same opportunities for a life-changing education that they did. Universities invest these funds to be able to spend the income from them on financial aid, research, and other costs — but the endowment itself is intended to last as long as the institution does.
In the House version, the tax rate on endowment income would soar from the current 1.4 percent to as much as 21 percent — a corporate tax rate. Even the Senate version, with an 8 percent top levy, would represent a nearly sixfold tax hike for universities paying 1.4 percent today. Both versions include a tiered system, where the tax rate rises with the per-student endowment value.
Why should anyone not currently enrolled at a university with a large endowment care about any of this?
After all, these tiers make this appear to be a “progressive” tax, in that those institutions with greater assets pay more. However, the effect of this tax will be thoroughly regressive: The cost will be borne by students from lower- and middle-income families who need financial aid.
An analysis by Wellesley College economist Phillip Levine last year found that highly endowed private institutions charge students from lower- and middle-income families the lowest net price of any category of institution — lower even than public universities. At MIT, for example, our endowment income allows us to offer free tuition to any student whose family earns less than $200,000 a year. Families that earn less than $100,000 a year are not asked to contribute any funds to the cost of attendance, including room, board, books, or personal expenses.
Levine also found that private schools with large endowments generally spend more educating each student than their published tuition and fees, which means that every student, in some sense, receives financial aid.
Certainly, without financial aid, students from less wealthy backgrounds would not be able to attend the country’s great private universities. This would be not just a loss to them but also to the nation itself, which benefits when talented people from all backgrounds have the same opportunity to rise based on academic achievement. It would also be a loss to universities, which would have to limit their student populations to the narrow slice of Americans who can afford to pay full tuition. At MIT, 6 out of 10 undergraduates receive financial aid and 4 out of 10 receive aid equivalent to the full cost of tuition or more. With this endeavor, we help to keep the American dream alive and try to make a society that is vastly unequal a little fairer.
However, the “One Big Beautiful Bill,” as passed by the House, would cost MIT approximately $500 million in new taxes annually. That is equivalent to the total cost of attendance for nearly 5,600 undergraduates — more than MIT’s current undergraduate population of 4,500. Even the Senate version is equivalent to MIT’s entire undergraduate financial aid budget each year. The tax on endowment income would raise only relatively modest amounts of revenue for the federal government, but it is large enough to have a major adverse impact on universities.
In addition, universities use their endowment income to support research. A corporate-level endowment tax would make it very difficult, if not impossible, for most universities to keep laboratories open with their own funds, which would be necessary in order to compensate for the drastic cuts to research funding proposed by the Trump administration.
Of course, universities recognize that the status quo in terms of endowment taxation is not the only option. Different groups of universities have suggested alternatives to Congress that would be more productive for the nation at large, including requirements to spend more of their endowments each year or to use the endowments to further increase financial aid.
But the excise tax, as proposed, is not sound policy. The House Ways and Means Committee explains it as a way to demand accountability from “woke, elite universities.” That is an admission of pure spite. The tax creates no incentive for universities to do anything differently. And it is completely out of harmony with a bill that is otherwise designed to reduce tax burdens.
As the Senate rushes to pass some version of the tax and spending bill by July 4, it needs to recognize that making it more difficult for the country’s low- and middle-income students to attend its best private universities is a very strange way to celebrate Independence Day. We can surely do better.
L. Rafael Reif is president emeritus and the Ray and Maria Stata Professor of Electrical Engineering and Computer Science at MIT.