(Bloomberg) -- Iowa’s Grinnell College for years was in an enviable position. Bolstered by Warren Buffett’s guidance decades ago, the tiny liberal arts school has grown its endowment to $2.7 billion, helping fund one of the most generous financial-aid programs in the country.
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That success is now a problem.
The draft tax bill released by House Republicans this week proposes significantly raising taxes on private universities — with levies based not on the size of the endowment, but on the amount per pupil. That would hit not only the elite schools that have been under scrutiny by the Trump administration, but also smaller liberal arts colleges that rely on their endowments for student needs.
Lawmakers proposed a 21% tax rate for schools that have an endowment of at least $2 million per pupil, which includes universities such as Harvard, Yale and Princeton. The scale then slides to 14% for colleges with endowments totaling more $1.25 million per student. Both would be a sharp increase from the current rate of 1.4%.
Grinnell had an endowment of about $1.5 million per student in fiscal 2024. Schools such as Pennsylvania’s Swarthmore College and Pomona College in California are also at risk of having to pay more in taxes.
At Grinnell, a 179-year-old college about an hour’s drive from Des Moines, more than 90% of its 1,700 students receive some form of aid. The school also meets 100% of students’ demonstrated need without loans. With no aid, the total cost of attendance with tuition and housing is more than $90,000 a year.
“We will be seriously challenged in providing the kind of financial aid that we have been,” Grinnell President Anne Harris said in an interview.
Harris estimated the increased taxes would cost the school about $30 million, drastically affecting its budget of almost $190 million. Grinnell paid about $2.4 million in taxes for the most recent year, she said.
Corporate Rate
The current 1.4% tax rate applies to schools with endowments of at least $500,000 per student. That generated more than $380 million from 56 colleges and universities in 2023, affecting just a fraction of the 1,700 private, nonprofit schools across the country.
Now, the wealthiest colleges would face a levy equivalent to the 21% tax rate for US corporations. Such schools have borne the brunt of President Donald Trump’s effort to reshape higher-education institutions, based on criticisms that they failed to address antisemitism on campus, place too much focus on diversity and have left-leaning biases.
On Tuesday, eight US agencies terminated $450 million in grants to Harvard, escalating a standoff with the nation’s oldest and richest university.
On its website, the House tax-writing committee touted that its bill “holds woke, elite universities that operate more like major corporations and other tax-exempt entities accountable, ensuring they can no longer abuse generous benefits provided through the tax code.”
Missouri Representative Jason Smith, chair of the committee, said in prepared remarks Tuesday that the top rate applies to “exclusive universities with the largest endowments, many of whom have failed to protect their Jewish students.”
Universities have said that higher taxes will come at the expense of the neediest students, and have mobilized their lobbying efforts on Capitol Hill. Harvard, for example, tapped the Republican-friendly lobbying firm that used to employ Attorney General Pam Bondi.
Steven Bloom, assistant vice president for government relations at the American Council on Education, said the proposal will take “enormous amounts of money” away from financial aid.
Smaller schools such as Grinnell “really spend their endowment resources on financial aid,” Bloom said. “It’s going to have a disproportionate impact to them.”
Details of the proposals could still change as the tax bill wends its way through Congress. Grinnell’s Harris said she has been speaking with Republican Iowa Senator Chuck Grassley about the tax, most recently on April 30. She reiterated to him that the school is using the endowment to fund financial aid for students.
“I will hop on a plane to DC anytime anyone is willing to listen,” she said.
Swarthmore, with about 1,700 students, relies on its endowment for more than 60% of its annual operating budget, said Andy Hirsch, a spokesman. The legislation as written would be “devastating” to small liberal arts colleges and hurt Swarthmore’s ability to provide aid, he said.
“A fundamental issue with the bill is that it fails to account for the different roles endowments play at small colleges compared to large research universities,” he said. “While some larger institutions draw from multiple revenue streams, endowments are the lifeblood for many small colleges like Swarthmore.”
Robert Gaines, Pomona’s acting president, said that the proposed levy would hit the Southern California school with a $40 million tax hike.
“Our ability to provide qualified students with a world-class education regardless of their ability to pay would be severely compromised,” Gaines said in a statement.
Even the most prestigious schools could see their credit ratings pressured by the endowment tax if it’s enacted in current form, Abigail Urtz, a strategist for FHN Financial, said in a report.
“Endowment income is an important source of operating funding for higher education institutions,” she wrote. “A material increase in the tax should be viewed as a significant risk to these institutions, especially smaller private schools with less of a competitive edge.”
Buffett Role
Grinnell’s investing success can be traced to Joe Rosenfield, a 1925 graduate who went on to serve as a trustee for almost six decades. When he joined the board, the college’s endowment was less than $100,000, according to the school.
Rosenfield was an attorney whose family owned Younkers department stores across Iowa and the Midwest. He turned to Omaha’s Buffett after being introduced to him by a cousin. The two men often shared ideas during late-night phone calls. Rosenfield died in 2000 at the age of 96.
“The more outrageous the act might seem for a college endowment, the better Joe and I liked it,” Buffett recounted in the forward to Mentor: Life and Legacy of Joe Rosenfield, a biography by former Grinnell President George Drake. “Every investment move was always entertaining for us and always (well, almost always) profitable. In fact, we truly had more fun making money for the college than we did in making investments for ourselves.”
Now, more than 60% of Grinnell’s operating budget is supported by the endowment’s payout. The school employs about 900 people in the town of Grinnell, which has a population of about 10,000.
Harris said she and other small liberal arts schools have been lobbying for an exemption to tax increases, arguing that the levy for colleges with 5,000 students or less should remain at 1.4%. Such schools have been successful at issues important to lawmakers, such as lowering student debt and having high graduation rates, she said.
“Small liberal arts colleges like us are doing exactly what they have said they want,” she said.
(Updates with comment from Pomona College in 21st paragraph)
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