Endowment Hoarding and Legal Responsibility: Reforming University Finance Through Tax Law

By Emily Muniz

Every year, tons of articles and statements are released by prestigious universities boasting their large endowments within the billions, alongside their endless commitments to advancing equity and diversity on their campuses. Yet tuition rates continue to rise annually, pushing more students into unsustainable debt. While a significant number of these colleges benefit from their wealth and considerable tax exemptions as 501(c)(3) nonprofit organizations, they persist in underutilizing funds from endowments for student support. Even during times of unprecedented tuition rates at prestigious institutions like Harvard, Yale, and the University of Pennsylvania, current financial law regarding endowment taxes, tax exemptions, and regulations on institutional expenditures fails to guarantee that endowment funds are used towards advancing equitable practices such as aid for students and tuition cuts. The escalating issue of college affordability calls for significant reform in U.S. financial legislation; specifically, reforms that would either incentivize or require universities to allocate a greater share of their endowments to student aid and tuition reduction, thereby consolidating their 501(c)(3) status, as elevated student aid reflects their dedication to putting students first while justifying their significant tax benefits.  

Understanding Endowments  

Endowments, defined by the American Council on Education as aggregations of “donated assets invested by a college or university to support its mission in perpetuity,”1 are designed to ensure the sustainability of educational programs and needs far into the future. Endowment funds typically go towards a variety of services such as but not limited to renovations, athletic facilities, research, and scholarships. Nevertheless, universities carefully utilize a small percentage of their endowments for investment reasons, enabling their endowments to grow and regenerate, thereby ensuring operational stability for the foreseeable future. Yale, for instance, “aims to spend 5.25% of the endowment’s value”2 per year similar to the University of Pennsylvania which “targets spending 5% of its endowment each year.”3 These low percentages indicate that the vast majority of their total endowment goes underutilized every year, especially when both Yale and Penn received returns on their investments that exceeded their expenditures, that is, a 7.1% return for fiscal year 2024 at Penn4 and a 5.7% return on endowment at Yale.5 While this certainly explains why endowments at Yale and Penn are increasing, it also draws attention to a significant problem: colleges could be doing more to direct endowment funds toward students but choose not to. Although some endowment funds are designated by donors for specific purposes, institutions such as Yale,6 Penn,7 and Harvard8 retain between 18% and 25% of their endowments as unrestricted, thereby affording them considerable flexibility in how they distribute those funds. So, while universities on average only spend “about 4 to 5 percent of the value of their endowment,”9 part of which includes money from restricted endowments, sufficient capacity remains within unrestricted funds to supplement student aid; however, this opportunity is rarely leveraged. 

Understanding the Legal and Tax Framework for Endowments  

The ability of universities to invest more in student aid raises significant concerns regarding their fulfillment of commitments as 501(c)(3) non-profit organizations. Tax-exempt status under IRC §501(c)(3)10 is restricted to organizations that operate primarily for charitable purposes, which the Treasury defines to encompass the advancement of education (Treas. Reg. §1.501(c)(3)-1(d)(2)).11 The broad language of the regulation suggests non-profit and tax-exempt organizations are expected to encourage educational advancement and development through accessibility. However, this expectation is undermined by the investigation of university endowment usage, which discloses billions of dollars that remain unused year by year, despite their potential to reduce students' financial burdens. To address the issue of wealth hoarding by institutions, 26 U.S. Code § 496812, established by the Tax Cuts and Jobs Act of 2017, enforces a tax of 1.4 percent on the net investment income of any university with a minimum of 500 tuition-paying students for the taxable year.13 The tax also only applied for universities with endowments of “at least $500,000 per student of the institution.”14 Nevertheless, the tax's impact has not been substantial, as most colleges with large endowments have enough capital to deal with the tax's effects comfortably. Thus, a new method is needed to solve the endowment issue. A sufficient model to look at would be 26 U.S. Code § 494215 which applies that private foundations must make “a qualifying distribution within the meaning of subsection (g)(1)(A) for any taxable year”16 equal to at least 5% of their net investment assets.17 If the foundation fails to do so, they will incur “a tax equal to 30 percent of the amount of such income remaining undistributed”18 by the beginning of the second taxable year. Furthermore, if “any portion of such income remains undistributed at the close of the taxable period,” the foundation will then incur “a tax equal to 100 percent of the amount remaining undistributed at such time.”19 Operating in this manner puts immense pressure on foundations to ensure that a sufficient amount of their net investments go towards charitable purposes. However, no comparable regulation exists for universities. Universities receive similar tax advantages to 501(c)(3) organizations but are exempt from taxation when electing to spend small amounts of their endowments. By establishing an equivalent regulation that establishes a minimum amount for aid expenditure, universities would successfully match their financial behavior with the public interest they pledge to uphold under their tax-exempt status. A regulation like this enhances equity as private foundations—like universities—are exempt from federal taxes owing to their enhancement of charitable practices. Therefore, universities should be subjected to comparable scrutiny, as they greatly benefit from tax breaks whilst not being subjected to equivalent regulations to ensure that their financial assets are truly designated to charitable endeavors, particularly given the underutilization of funds amid the escalating burden of debt faced by students in higher education.  

The Problem: Tuition Rising Despite Endowment Growth 

Because endowments exist solely for the purpose of supporting the missions of universities, and extending educational programs, it makes sense to assume that increasing endowments would be followed by increases in student enrollment and decreases in tuition costs. Economist Vedder even highlights in Restoring the Promise that “economic theory suggests that endowments can provide funds to allow lower prices (tuition fees) to optimal consumers, leading to greater enrollments.”20 However, the opposite has proven to be true.  

As reflected in Table CP-2, average tuition and fees across American universities alone increased roughly 75% from $24,840 in academic year 1994-1995, to a whopping $43,350 in academic year 2024-2025.21 Furthermore, tuition has shown a consistent upward trend from the 2014-2015 to the 2024-2025 academic year, despite a few temporary declines. Comparing tuition trends to endowment growth at universities, research by Inside Higher Ed reveals that the average endowment of the 60 most prestigious and wealthy universities increased from slightly above 707 million in 1990 to over 9 billion in 2021, representing a 423% increase over approximately 30 years.22 With America’s top universities experiencing such immense financial growth, it’s perplexing that so many students still struggle with covering college costs. Paradoxically, “average published tuition and fees at the twenty most highly endowed per-student schools in America are about $17,000 higher than at the typically (lowly) endowed schools.”23 Although these highly endowed institutions offer better financial aid in comparison to other schools, the amount is minimal, roughly $3,000 every year. This is especially noteworthy considering that "the average highly endowed school has over $40,000 more in annual endowment income per student,"24 indicating that less than 8% of this revenue is distributed to student aid. The disparity between rising endowments and tuition reveals a serious problem with college affordability, calling into question universities' sincere efforts to make their schools accessible to the various communities they vow to serve and protect. 

Unlike private corporations, there is no mandate for nonprofits to maximize profitability, however nonprofits have increased flexibility and less accountability on how and where they allocate their capital. Consequently, the absence of provisions such as IRC § 494225 in institutions of higher education calls into question their compliance with nonprofit standards as high tuition costs establish barriers against many college students. From a corporate perspective, it is regarded as a fiduciary duty to optimize shareholder value, which presents an issue for corporations that opt to hoard their capital. Although universities function similarly to corporations and seek to grow their investments—endowments—they do not face the same level of scrutiny as for-profit organizations. Despite the challenges posed by elevated tuition fees, the law does not hold colleges accountable for mitigating the financial challenges associated with high tuition rates, and thus, accessibility. Agency theory suggests that universities prioritize elements that directly contribute to their institutional wealth, including donor interests, even when external concerns pertain to the instructional purposes of the institution. Shareholders may initiate legal proceedings against firms that neglect their fiduciary responsibilities; yet donors and students lack the ability to pursue actions against colleges for "violating" their instructional missions and accumulating endowments. In the absence of regulations governing nonprofits, including universities, these institutions are free to hoard huge amounts in their endowments, allocating minimal funds to student support, while maintaining tax-exempt status, which is intended as an incentive for serving the public good. 

Endowments against Accessibility: The Research on Disparities in College Affordability 

While we’ve addressed the overarching trend between rising tuition and rising endowments amongst universities, data on Harvard and Yale are exceptional cases that highlight how even the universities with the largest endowments can still charge some of the highest tuition costs. An article published by the Harvard Magazine details that undergraduate tuition fees propelled upward “from $278.4 million to $390.8 million”26 from 2021 to 2022, over a 40% increase. It’s important to also note that the increase is due in part to Harvard extending their class size from ~5,200 to ~7,095. Nonetheless, costs for graduate and professional degrees also increased to “$652 million, up from $581.3 million.”27 And with tuition costs on the rise for both undergraduate and graduate students, the influx of “enrollments brought student income to 21 percent of revenue” while the endowment payout was 36%, making student income the second largest source of revenue for the university.28 Despite owning the largest academic endowment internationally, Harvard University depends heavily on student tuition to finance its daily operations. Harvard's reliance on student financing reveals an obvious concern. Many prestigious universities, such as Harvard and Yale, operate analogously to businesses, prioritizing the development of wealth through endowments over their educational objectives, therefore neglecting to reduce tuition costs for economically disadvantaged students. By abstaining from leveraging their endowment, low-income applicants face even greater hurdles in college admissions. Harvard’s financial report for fiscal year 2024 details that Harvard has a whopping endowment of $53.2 billion.29 In 2024 alone, $2.4 billion went towards operations for the university, yet represented only 4.5% of the total endowment. Of this $2.4 billion, only $557 million went to student aid, which was 23% of the $2.4 billion but only 1% of the total endowment. At first glance, 23% may seem like a generous amount, but considering how the university also had a rate of return of 9.6% ($5.11 billion) on their endowment, it's clear that students are being bypassed for little practical reason. The money to help students is there, it’s just not being touched.  

As indicated in Figure 5 of the Endowment Radar Study of 202430, at the 25th percentile, universities are only utilizing 0.3x their endowment payouts relative to their discount on tuition. Furthermore, looking at the 0.6x median, we can see that endowment payouts are still less than scholarship allowances. It is only at the 75th percentile where schools’ endowment payouts exceed their scholarship allowances, and only by $23,000. Essentially, these factors illustrate that institutions have the capacity to put more money towards scholarships but choose not to. Looking towards the 25th percentile, schools are offering more in scholarship discounts without matching it to their endowment support, which indicates that they’re likely to make up the difference by raising tuition costs. In contrast, more heavily endowed universities (75th percentile) are in a safer position to provide aid but still don’t go as far as they really could. In fact, with universities hoarding their endowment and wealth, inequality can be expected to worsen.31 So, while the provisions under 26 U.S. Code § 496832 were designed to discourage universities from hoarding wealth by placing a 1.4% excise tax on the investment incomes of these universities, it only does just that. It only penalizes universities for accumulating large amounts of wealth. By revising the legislation to incorporate explicit directives about the allocation of finances, we can anticipate that universities will operate more in accordance with their goals to enhance and promote education within diverse communities. In the 2013 IRS College & University Compliance Project33, which assessed 34 randomly selected universities to see how they complied with the government, they found that a vast array of universities falsely reported the amount of unrelated business income (UBI) they were receiving. Specifically, ”the IRS determined that nearly 40 percent of colleges and universities examined has misclassified certain activities as exempt or otherwise not reportable on Form 990-T.”34 Due to the significant misallocation of funds by universities, which adversely affects students and contradicts their missions amidst increasing tuition rates, it is imperative to enforce fiscal regulations to a) guarantee that endowment funds are utilized for academic and equitable objectives and b) safeguard and justify the tax-exempt statuses held by universities. 
 
 

The Larger Issue: Educational Equity and Accessibility 

Although elevated college costs frustrate most individuals pursuing higher education, they disproportionately impact low-income households. As the cost of college grows, keeping it increasingly inaccessible, the gap between the rich and poor expands. Certain universities, such as NYU and Harvard, have established programs allowing students to attend tuition-free, provided their family income is under the set thresholds of $100,000 and $200,000, respectively. Although this seems to be a fantastic solution to the pervasive issue of college expenses, there is an underlying downside to these efforts. Student tuition represents an important source of revenue for elite institutions such as Harvard, thereby constraining the admission of "lower income" students and intensifying competition among low-income families, while diminishing the stakes for students from families exceeding the threshold for free tuition. This indicates a major structural problem, particularly with the rollback of DEI initiatives that are financially weakening programs designed to assist students from underrepresented backgrounds. Some executive orders enacted by Trump mandate that institutions and schools receiving federal financing must demonstrate the disintegration of DEI; failure to do so will result in the complete loss of government funding.35 Thus, it’s even harder now than in previous years for low-income students to get their foot in the door at the best schools in the nation. Nonetheless, it’s enrollment at these large universities that give students the capacity to financially reach the top to begin with. In Vedder’s Restoring the Promise, he lists out the universities with the highest endowments with the first six being Harvard, Yale, University of Texas System, Princeton, Stanford, and MIT which are simultaneously considered amongst the best schools in the nation36. Additionally, “ten of the past twelve presidents of the United States and all nine current Supreme Court Justice attended [...] college[s…] most of which were highly endowed private schools.”37 This trend among the Supreme Court highlights the value of not just obtaining an education but receiving one from a renowned university. Nonetheless, cross-referencing with the list provided by Vedder, six of the most highly endowed universities of 2015 were also in the top 20 most expensive schools in the U.S.---Northwestern, Dartmouth, Duke, University of Southern California, University of Chicago, and Columbia.38 Thus, although elevated college expenses affect all students, they significantly penalize those seeking admission to prestigious institutions; schools that possess the financial resources to improve aid yet frequently put investment returns above accessibility. 

The university trustees hold fiduciary responsibility for maintaining the mission of their non-profit status: advancing education. However, when the board of trustees prioritizes endowment returns over tuition reduction and accessibility, many colleges commence a process of "mission drift," which is legally defined as a deviation from a fundamental part of their missions. This is especially detrimental when universities have advantages such as tax exemptions under the pretext of serving "charitable purposes," which is evidently not the case when they prioritize investments over their own students. This brings into question whether colleges are genuinely meeting the requirements for their tax exemptions, and what the negative implications of this are. When universities experience mission drift and exhibit misalignment with their charitable objectives, they may face IRS scrutiny under the intermediate sanctions' provisions outlined in 26 U.S.C. § 495839, which penalizes institutions for utilizing their tax-exempt status for private benefit instead of public welfare. 

The Solution 

Given the high cost of education and the fact that most prestigious universities only distribute just a fraction of their endowment funds to student aid, one solution would be to require or incentivize universities to delegate a certain percentage of their endowments to tuition reduction and financial aid. The overarching financial divide that has historically afflicted the US will be reduced because of this, as it will not only increase yield rates at elite colleges but also enable students to both afford and attend schools like Harvard, Stanford, Yale, etc. Mandating that schools allocate an absolute minimum of 10% of their yearly endowment disbursements towards need-based financial assistance and tuition reduction enables universities to improve their affordability and effectively connect lower-income populations while safeguarding their sustainability over the long term. For instance, in 2017 the Tax Cuts and Jobs Act was passed which implemented an endowment tax of 1.4 percent on universities with “at least 500 students and endowment assets [that] exceed $500,000 per student.”40 While there was a lot of discourse surrounding the ethics of taxing charitable donations, it encouraged universities to operate closer to their missions of “creating and disseminating knowledge” rather than engaging in “revenue-generating activities that resemble those pursued by taxpaying commercial enterprises”41. Nonetheless, a downside of the endowment tax was that it did not require that funds be redirected toward aid. As previously stated, § 496842 could be amended to incorporate a stipulation for conditional distribution, requiring, for example, a 5-10% annual allocation for aid to institutions that already satisfy the criteria for the 1.4% endowment tax, functioning similarly to § 494243 for higher education institutions. Congressman Vern Buchanan even introduced a bill that would “incentivize universities to [...] spend more of their endowment funds on programs like student financial aid.”44 While Buchanan's motivation for the legislation stems from harmful nationalist ideals and punishing international students for exercising freedom of speech on American campuses, the basic structure of mandating colleges to set aside funds for aid is a way of improving opportunities for low-income students. Therefore, even though certain endowment donations are legally earmarked, many other funds have no fixed purpose and could be used for aid.  

Why We Need Reform 

The United States and its universities, which portray themselves as beacons of opportunity and success, neglect to utilize their substantial wealth from endowments to reduce tuition costs for students, thereby creating a significant moral dilemma regarding educational equity that will worsen if left unresolved. These expenses are atypical, serve only a minor segment of the population, and impose enduring consequences on many students, including incurring substantial debt amounting to hundreds of thousands of dollars. Data shows that when endowments increase, tuition concurrently rises, exacerbating the issue of inequality year to year. Legislation mandating colleges to allocate a specific percentage of their endowments for financial aid and tuition reduction addresses a persistent ethical dilemma regarding educational justice. These measures are crucial for ensuring that institutions with tax-exempt status adhere to the same financial guidelines as corporations, where asset creation is regulated and held liable to stakeholders. Considering the scrutiny faced by DEI programs, universities must prioritize their role as educational institutions rather than operating as businesses; their primary objective is to prioritize education. If universities prioritize investing objectives while benefiting from nonprofit status, they may face examination under I.R.C. § 501(c)(3)45 and possibly I.R.C. § 4958.46 Higher education is sometimes inaccessible for the middle class, as enormous college expenses compel students to settle for lower-ranked colleges due to their price tag. Education should not be seen as a privilege solely for the wealthy but rather as a resource accessible to all individuals. Addressing the issue of college costs demands implementing reforms in the endowment system. To properly fulfil their commitments to advancement in education, colleges must reform their endowment usage and ensure that college affordability is available to all, rather than merely a privileged few. Without enhanced legal control, universities will continue leveraging their advantages without genuinely aligning their efforts with the public interest.