How the One Big Beautiful Bill Act, Now Law, Reshapes the Endowment Tax for Universities

Hello, dear readers. I’m back at Nonprofit Law Prof Blog, and I wanted to start this week with a roll up of the changes to university endowment taxation that were recently passed into law. Buried in the sweeping legislative package known as the One Big Beautiful Bill Act (OBBBA) are significant changes to the endowment tax imposed on private colleges and universities, which once upon a time were thought of as nonprofits. While much of the attention has focused on the Act’s broader tax and spending provisions, the OBBBA quietly rewrites key portions of I.R.C. § 4968, which governs the excise tax on net investment income for certain educational institutions. These changes carry major implications for how universities manage and report their endowments—and who gets taxed.

Under current law (the legislation known as the Tax Cuts and Jobs Act of 2017 (TCJA)), private colleges and universities meeting certain size and wealth thresholds are subject to a flat 1.4% excise tax on their net investment income. The OBBBA retains the basic framework but replaces the flat rate with a graduated tax structure based on a new metric: the “student-adjusted endowment.” This figure reflects the value of an institution’s investment assets per tuition-paying student, effectively linking the tax burden to how deeply endowed a school is relative to its student body.

The new tax rates are as follows:

• 1.4% for institutions with a student-adjusted endowment between $500,000 and $750,000;
• 4% for those between $750,000 and $2 million; and
• 8% for those exceeding $2 million.

This marks a substantial increase in tax exposure for the wealthiest institutions—particularly elite universities with large endowments and relatively small tuition-paying populations.

So, who’s affected? Nearly all of the same universities who paid the tax before, but many affected universities will pay higher tax rates. But I hedge by saying, “nearly all,” because the OBBBA, as passed, raises the applicability threshold for the endowment tax. Previously, institutions with at least 500 full-time equivalent students, of whom more than 50% paid tuition, were subject to the tax. The new law increases that floor to 3,000 tuition-paying students, narrowing the field of affected schools but hitting some of them harder.

But maybe the field of impacted schools won’t be so narrow. Perhaps more quietly—but no less significantly—the bill broadens the definition of net investment income. Under the revised § 4968, the tax base will now include certain categories previously excluded, including interest from student loans and royalties from certain intellectual property (likely targeting commercialized research outputs). These changes will likely widen the taxable base, especially for institutions with large portfolios of tech transfer and lending operations.

The OBBBA also imposes new transparency and reporting requirements, obligating schools to disclose the number of tuition-paying students and additional data used in calculating the student-adjusted endowment. This likely reflects growing Congressional interest in endowment accountability, particularly as lawmakers scrutinize how institutions use (or don’t use) investment income to reduce student costs. But it is also just the latest effort to target elite universities.

Notably, the final version of the OBBBA reflects significant changes made in the Senate. The House’s version originally proposed a much steeper tiered system, going as high as a 21% endowment tax rate. Senate negotiators rejected that approach, instead pushing for the more modest graduated rate structure described above. While I didn’t support either approach, the Act, as passed, does better account for institutional diversity. It avoids punishing small- to mid-sized schools, because the Senate raised the applicability threshold from 1,000 to 3,000 tuition-paying students. But the Senate also added the expanded definition of investment income, as described above, which had not been included in the original House draft, meaning that more sources of income beyond endowment returns count toward the Act’s definition of income.

All changes will take effect January 1, 2026, giving institutions just a few months to prepare.

Although the TCJA imposed the first endowment tax, subjecting over 50 nonprofit universities to tax burdens in the last tax year alone, the OBBBA represents a major shift in how Congress regulates and taxes university wealth. While there are still relatively few institutions are directly affected, the law sends a clear message: accumulated endowment wealth is no longer sacrosanct—and elite universities remain squarely in the political crosshairs.