Amay Tewari, Senior Photographer

On Thursday, the U.S. House of Representatives advanced Republican budget legislation that would substantially increase the tax on Yale’s endowment investment income — which could limit students’ financial aid and decrease research funding, experts told the News. 

The budget bill, titled the “One Big Beautiful Bill Act,” includes a hike to universities’ net investment income tax, which was first introduced during the Trump administration in 2017 at a flat rate of 1.4 percent for certain universities, including Yale. 

The News interviewed experts in higher education, tax law and economic policy, who discussed the legislation’s contents and its potential impacts on university research and financial aid. 

How would the endowment tax proposal work?

The new proposal introduces a tiered rate system, which is dependent on an institution’s “student-adjusted endowment” — the ratio between the total endowment value and the full-time student population. Universities with higher ratios will face steeper endowment tax rates. 

Under the bill, international students are excluded from the student population and unaccounted for within the student-adjusted endowment. 

Based on Yale’s student-adjustment endowment, which is currently estimated to be $3,640,000 per student, the University’s endowment would face the highest tax rate, 21 percent. This is predicted to cost the University $690 million a year, according to recent estimates by Phillip Levine, an economics professor at Wellesley College.

“Each year, this increased endowment tax would strip from Yale’s budget hundreds of millions of dollars that currently fund financial aid, research, scholarship, and teaching,” McInnis wrote in a Thursday email to the Yale community. “This legislation presents a greater threat to Yale than any other bill in memory.” 

Although the tax rate is calculated using institutions’ total endowment, only the investment returns from the endowment are subject to taxation. The University’s total endowment for the 2024 fiscal year was around $41.4 billion, while the endowment’s investment returns were $2.3 billion. 

“The bill fits into this larger pattern that we’re seeing, that the administration is really hostile to research,” Jennifer Berkshire, an education studies professor at Yale, told the News. She added that the legislation falls within a broader “retreat” from the idea that “expanding access to higher education was good and worthwhile.” 

‘Quite significant’ impacts to financial aid and research funding

For the 2024 fiscal year, the endowment was the single largest source of revenue for Yale and contributed to 34 percent of the University’s total operating revenue. 

During the 2024 fiscal year, over 50 percent of endowment expenditures were allocated on research and financial aid, according to Stephen Murphy ’87, the University’s vice president for finance and chief financial officer. Murphy emphasized that an increased tax on the endowment would significantly damage Yale’s ability to provide aid. 

Murphy also pointed to developments in cancer treatment, quantum computing and artificial intelligence, thanks to University research funded by the endowment. Basic research, Murphy added, would also be impacted, noting that this type of work is the foundation for other advancements.  

Elizabeth King LAW ’18 — a lecturer at Harvard Law School — wrote to the News that the amount deducted as tax will be “quite significant” for affected institutions, although it would “not significantly” improve the United States’ budget deficit, which Republicans backing the budget bill claim. 

King wrote that this discrepancy likely indicates that the tax is a “symbolic,” rather than financially-motivated, function.

Her remarks were echoed by Martha Gimbel, the executive director and co-founder of the Budget Lab at Yale. Gimbel emphasized that university level research is fundamental to U.S. economic growth. She described higher education as a “major export,” considering the international students who attend American universities.

“[This export] gives us two things. One is an economic benefit, right? That we are selling this to people,” she said. “But the second is this opportunity to influence how people around the world are thinking, and it is astonishing to me that [this] is an advantage that we as a country want to give up.”

Gimbel pointed out that students who attend college tend to receive higher wages than those who don’t. The House proposal would limit eligibility for Pell Grants, which could reduce the number of students who are able to pursue higher education.

Under the proposed bill, a Department of Education program called Direct PLUS Loans — which provides loans to eligible graduate and professional students, as well as to parents of undergraduates — would be eliminated for graduate students. 

The legislation would also repeal certain student loan repayment and forgiveness programs, while establishing the Repayment Assistance Plan, a repayment plan based on income. Tax relief on certain loan programs would expire. 

Limited opportunities for university opposition 

On Thursday, University President Maurie McInnis urged members of the Yale community to call their senators and advocate against the proposed endowment tax increase, emphasizing the detrimental effects that the proposal would have on the university’s ability to fund research and offer financial aid. 

King told the News that universities may attempt to challenge certain clauses within the proposal. However, she noted that the legislation is primarily a political matter, rather than “a legal action that can be challenged in the courts.” 

Lauren Libby GRD ’29, a doctoral candidate at Yale Law School, echoed these remarks. She said that the proposal — which is over 1,000 pages long — is so substantial in size that she is concerned that the legislation on the endowment tax would not be substantially reviewed during the Senate voting process. 

The 21 percent tax that Yale could face is the same rate that the institution would face if it were a corporation, Libby added. Universities are classified as charitable organizations — not corporations — making them exempt from federal income tax. In order to maintain their tax-exempt status, institutions’ lobbying efforts are limited, and they are prohibited from political campaigning.

The bill will be reviewed by the Senate in upcoming weeks. Murphy, Yale’s chief financial officer, wrote that the University is currently monitoring the situation and preparing for “multiple scenarios.” 

In April, Yale considered selling a portfolio on the private equity secondaries market. According to Libby, the returns from this investment would be subject to the endowment tax, as a form of realized income. 

Yale’s Chief Investment Officer Matt Mendelsohn ’07 told the News that the University has been considering a private equity sale for “many months.” He noted that the decision was a standard investment strategy and was independent from discussion surrounding the endowment tax. 

Mendelsohn said that the University has a diversified strategy that focuses on “long-term capital allocation” and “deep partnerships” with investment managers. He emphasized this strategy’s contributions to maintaining the endowment’s growth, withstanding various economic situations.

However, he said that “the potential magnitude of the endowment tax is such that no adjustment to our investment strategy could compensate for the financial impact of the tax increase.” 

As of June 30, 2024, Yale’s endowment was valued at $41.4 billion.