→ A Significant Shakeup: With Trump’s big beautiful bill passing the House and awaiting passage in the Senate, university endowments brace for a possible massive tax increase that could fundamentally change the way they manage their assets. 

As it stands now, the tax and spending package raises the tax on investment income for university endowments from seven percent to as high as 21 percent, depending on the size of the portfolio. Per the Wall Street Journal, some endowments are considering somewhat tax-friendly plays like private equity, while working to better balance that with their cash needs. However, some school officials may significantly reduce their illiquid PE holdings, since they could need more cash to cover both new tax bills and the commitments they’ve already made without sacrificing future returns.

Speaking with Hirtle Callaghan’s John Griffith over the phone this week, he told me if the raise is implemented, “there are going to be significant changes in how they manage their assets.” After-tax returns will be a major focus for endowments, which would disincentivize investing in hedge funds or bonds, given the hefty taxes on income. Griffith speculated that institutions may shift away from active managers and into index funds, which trade less frequently — allowing them to keep gains unrealized and defer tax liabilities. 

And this wouldn’t just change the way endowments manage their portfolios — it could even change the way big donors give to schools. They could set up foundations to give an annual gift to the school to lower that effective tax rate.

As Griffith told me: “It’s going to be a significant shakeup,” before adding that “most of the schools haven’t even begun to think about this.”

While high-net-worth investors and family offices have plenty of experience managing assets with taxes in mind, this is a whole new ballgame for endowments. And not just the large schools would be affected — smaller endowments like CalTech’s $4.3 billion portfolio could also be hit with the 21 percent tax hike, since the rate would apply to schools with endowments of more than $2M per American student. And even the schools faced with a seven percent tax hike would still have to manage for taxes.

Should an excise tax hike go into effect, Bloomberg Opinion columnist Matt Levine and his readers have speculated on some possible workarounds. While Levine cautions to take these suggestions with a grain of salt, they include abolishing tuition (while raising room/board fees) to fall below the 500-student threshold for the tax, routing donations through donor-advised funds (DAFs), or going the for-profit corporate route.

Feasibility of these solutions aside, there’s still also the slippery slope of it all. The government is looking for revenue. Once the government finds something new to tax, it is likely to not only keep raising rates but also, as one source pointed out earlier this year, expand the net — to foundations, sovereign wealth funds in the U.S., and other tax-sheltered investors.

All of this of course builds to another big question: what does this mean for the future of the famed endowment model? Is it dead? On life support? Being put in cryogenic stasis until the allocators crowdsource a better idea? Tell me what you think — you always do.