A handful of mostly private four-year colleges and universities have massive endowments, measured in the billions of dollars. They have been compared in magnitude to the GDP of many countries. Those funds are invested aggressively to generate the largest possible returns. Critics have labeled these institutions as “hedge funds that have a university.”
Such concerns led to the introduction of a tax on highly endowed colleges and universities. As part of the Tax Cuts and Jobs Act (TCJA) in 2017, colleges and universities with more than 500 students and endowments larger than $500,000 per student are now required to pay a tax of 1.4% on the total income from their endowments. In 2021, 33 schools were subject to this tax—a tiny fraction of the American higher education sector but one that receives considerable public attention. Proposals to extend the endowment tax to more institutions and increase the tax rate have proliferated recently.
