Private Universities See Endowments Chiseled Away by Federal Taxes

Stanford is an important study on the negative impact of the new federal endowment tax on private universities. This leading school will see its fiscal transfer to Washington increase from around $175 million over the next five years to near $1 billion, depriving it of critical funding.

In response, Stanford has plans to lay off hundreds of key staff, suggesting that the university will have a smaller footprint than in the past. Additional restructuring will likely mean terminating some doctoral programs and limiting capital spending initiatives on libraries and laboratories, among other projects.

At play here is interpreting the extent to which the federal government should subsidize elite universities. One side of the argument is that major private universities build world-class industrial competitiveness; the other side suggests that it is unfair to subsidize these schools at the expense of broad-access public institutions. The debate becomes deeply political in short order.

Top-ranked schools have options. The Economist points out in a mid-August article that Ivy League institutions have borrowed about $1.7 billion in bond markets so far this year, the most since 2020. These debt offerings commonly carry interest rates that align with AAA corporate credits, at least for those universities with outsized endowments. The market is less forgiving of private schools with limited-scale cushions.

Debt proceeds can be used to commit more capital to higher return, illiquid assets, while reducing selling pressure in down markets. At the largest private schools, leverage now becomes an essential component of their investment strategies. Universities with smaller per-student endowments are taxed at lower rates, suggesting less acute portfolio-performance standards. ■

Learn more at the San Francisco Chronicle

Image shows a cast of “The Burghers of Calais” by Rodin on the Stanford campus. Credit: Mvaligursky at Deposit Photos.