Swarthmore and Bryn Mawr exempt from federal tax on endowments; University of Pennsylvania faces higher tax payments due to budget changes.

In a notable development for higher education funding, small private colleges Swarthmore and Bryn Mawr have benefited from recent legislative changes regarding federal taxes on endowment earnings. This shift comes amid a landscape where many institutions face financial strains due to reduced federal support and threats of increased taxation.

The new budget legislation, signed into law by President Donald Trump, introduces significant changes to how endowment taxes are applied. Under the prior framework established in 2017, colleges with endowments exceeding 0,000 per student had to pay a federal excise tax of 1.4%. As a result, Swarthmore, which commands a .7 billion endowment, was liable for approximately million in fiscal year 2024. Similarly, Bryn Mawr, with an endowment of .2 billion, had to pay around 3,000 in the same period.

The recently enacted law exempts smaller institutions with 3,000 or fewer students from this excise tax. This exemption is particularly vital for institutions like Bryn Mawr and Swarthmore, which, along with a coalition of 25 small liberal arts colleges, have been vocal in their advocacy for such measures, citing the disproportionate impact of the tax on smaller colleges.

The president of Bryn Mawr, Wendy Cadge, expressed gratitude for this exemption, emphasizing its remarkable potential to enable the college to channel more resources toward its students and their educational futures. Typically, the college allocates around 40% of its annual operating budget, which amounts to nearly 0 million, from its endowment, with a significant focus on financial aid initiatives.

While smaller colleges celebrate this legislative victory, larger institutions remain subject to higher taxes. The University of Pennsylvania, with an enrollment exceeding 24,200 and an endowment of .3 billion, is set to face an increased excise tax of 4%. This increase, while less steep than earlier proposals that could have imposed rates between 14% to 21%, remains a concern for the university as it concurrently anticipates a significant reduction of 0 million in research funding due to proposed National Institutes of Health changes.

The revised taxation structure introduces a tiered system based on enrollment and endowment size, impacting both small and large institutions differently. Colleges that exceed the 3,000-student threshold and maintain varying endowment per student amounts will be taxed at different rates ranging from 1.4% to 8%, depending upon their financial standing.

As these changes unfold in policy, they have sparked a wider conversation about the sustainability and viable funding avenues for colleges nationwide. Advocacy groups like the American Council on Education express ongoing concern regarding any taxation on endowments, highlighting the fundamental role that these financial resources play in supporting educational initiatives, financial aid, and research endeavors.

The implications of this legislative change extend beyond immediate fiscal relief for some colleges. The broader educational landscape continues to grapple with the complexities of financial aid restructuring that could necessitate increased reliance on private loans for students, complicating their paths to higher education and potentially stunting enrollment growth in the wake of increased administrative burdens.

As the academic community navigates these shifts, the prospect of further federal funding cuts looms large, suggesting that strategic financial planning will become paramount for both small and large institutions in the coming years. The outcomes of recent legislative changes will likely reverberate throughout higher education, influencing the accessibility of education for diverse student populations across the country.

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