Congress Taxes College Endowments But Still Sends Them Financial Aid — That Makes No Sense

Harvard University sits on an endowment (PDF File) worth roughly $56.9 billion. That’s more than the GDP of over 100 countries. Yet in the 2024-25 academic year, Harvard students still received over $14.4 million in need-based federal grants and another $5.3 million in non-need-based aid, according to its own Common Data Set filing. 

Harvard is not alone. Yale, with a $41.1 billion endowment, Princeton at $36.4 billion, Stanford at $37.6 billion, and MIT at $24.6 billion all participate in Title IV federal student aid programs. These schools receive Pell Grants, Federal Supplemental Educational Opportunity Grants (FSEOG), federal work-study funds, and process billions in federal student loans for their students.

The endowment tax signed into law on July 4, 2025, as part of the One Big Beautiful Bill Act, is a step in the right direction. But it doesn’t go far enough.

The federal government should stop giving Title IV financial aid (including Pell Grants and federal student loans) to colleges that are sitting on massive endowments generating investment profits. If a college has the resources to fund every student’s education from its own endowment returns, American taxpayers shouldn’t be subsidizing it.

And every dollar in financial aid funds spent at these wealth schools is a potential dollar that could be spent at a college that really needs the funds: think state or community colleges that deliver positive student results but may lack that extra funding.

The Numbers Don’t Add Up

The scale of accumulated wealth in American higher education is staggering.

More than 80 colleges and universities have endowments exceeding $1 billion. This includes not just private elite institutions but also massive public university systems. The University of Texas System holds $47.5 billion. Texas A&M holds $20.4 billion. The University of Michigan holds $19.2 billion. The University of California system holds $19.1 billion.

Among private institutions, the numbers are even more striking when viewed per student. Harvard, Yale, Princeton, Stanford, and MIT each have endowments above $2 million per student. Another 18 institutions exceed $1 million per student. These schools collected billions in investment returns in 2024 alone, growing their wealth while simultaneously accepting federal taxpayer dollars.

Critics of endowment reform often point out that much of this wealth is “restricted” by donor wishes – going towards a building or a certain school’s dean’s salary. But the data tells a different story.

About 40% of higher education endowment assets are subject to permanent restrictions, 30% are temporarily restricted, and roughly 29% are quasi-endowment—meaning the institution itself chose to set the money aside and can choose to spend it differently.

At Harvard, unrestricted funds account for approximately 20% of its endowment. That’s still roughly $10 billion in unrestricted funds alone – more than the total endowment of most universities in America.

The New Endowment Tax Is A Start, But Not Enough

The One Big Beautiful Bill Act introduced a tiered endowment tax that replaced the flat 1.4% excise tax that had been in effect since 2017.

The new rates are based on endowment dollars per student: 1.4% for institutions with $500,000 to $750,000 per student, 4% for $750,000 to $2 million per student, and 8% for those exceeding $2 million per student.

The tax applies to private institutions with at least 3,000 tuition-paying students, more than 50% of whom are in the U.S., and at least $500,000 in endowment per student.

Yale’s president estimated the university will pay approximately $280 million in the first year under the new rates. Harvard, with the largest endowment, will likely pay even more. 

Taxing endowment income is a reasonable policy. But taxation alone doesn’t address the core absurdity: that these same institutions continue to receive federal student aid. Yale students still received nearly $19 million in Federal aid, when you combine both the student and parent grants and student loans.

The tax says, “You have too much money, so we’ll take a cut.”

The smarter policy says, “You have too much money, so use your own resources to help your students.”

And once you see the numbers, it’s hard to ignore. Yale knows that their families received $19 million in aid (including $6 million in student loans) – knowing full well they have so much in excess funds they’ll pay $280 million in taxes. If they won’t make the right decisions for their families, the government should.

We “Means Test” Americans For Many Social Programs — Why Not Colleges?

The United States operates roughly 80 means-tested federal programs, spending over $1 trillion annually on benefits for low-income Americans.

These programs span every area of life: Medicaid for healthcare, SNAP for food assistance, Section 8 vouchers for housing, Temporary Assistance for Needy Families (TANF), the Earned Income Tax Credit, and Supplemental Security Income, among dozens of others.

Every one of these programs requires applicants to prove they lack sufficient resources before receiving help. A family earning too much can’t get Medicaid. A household with too many assets may be denied SNAP benefits.

The principle is straightforward: government resources should go to those who need them, not to those who can afford to help themselves.

Yet we apply no equivalent standard to the institutions that receive federal student aid. Harvard, with $56.9 billion in endowment assets, receives the same type of Title IV funding as a community college with no endowment and a student body that is overwhelmingly low-income.

A regional state university serving first-generation students gets the same category of federal Pell Grant funding as Princeton, which is sitting on $3.75 million per student.

If a family earning $200,000 a year can’t get food stamps, why can a university sitting on $53 billion get Pell Grant money?

Federal Aid Should Go To Both Students AND Colleges Who Actually Need It

The Pell Grant program disbursed $36.6 billion to 7.2 million recipients in the 2024-25 award year. The maximum individual Pell Grant was $7,395.

This is the primary federal grant program for low-income students and it faces a projected $11.5 billion shortfall. At the same time, Pell dollars are flowing to students at schools that could easily replace every dollar of federal aid with institutional money.

Consider what redirecting those funds could accomplish. The federal grants going to students at the 23 schools with over $1 million in endowment per student could instead be routed to community colleges, regional public universities, and historically Black colleges and universities (HBCUs)—institutions that serve the students who need help the most and have the fewest institutional resources to provide it.

Just looking at the data for these few schools – implementing these proposals would shift over $100 million in financial aid to colleges that need it.

The federal aid being sent to these institutions is a rounding error on their balance sheets. But for a community college struggling to keep its doors open, those same federal dollars are the difference between offering classes and cutting programs.

The Proposal: Ban Title IV for Endowment-Rich Schools

Congress should pass legislation prohibiting institutions from participating in Title IV federal student aid programs (including Pell Grants, Federal Supplemental Educational Opportunity Grants, federal work-study, and federal student loans) if the institution’s endowment generates a net investment profit in any given fiscal year AND the institution meets certain endowment-per-student thresholds.

A reasonable threshold might mirror the existing endowment tax brackets. Any private institution with more than $500,000 in endowment per student that generates a profit on its investments should be required to replace federal student aid dollar-for-dollar with institutional aid.

You don’t need taxpayer money to educate your students—use your own.

This isn’t about punishing these schools. It’s about allocating scarce federal resources where they’re actually needed.

Schools like Harvard, Yale, Princeton, and Stanford already provide generous institutional financial aid. They have the infrastructure and the assets to cover every dollar of federal aid their students currently receive. In many cases, they already supplement federal aid with their own funds anyway.

For students at these institutions, the transition would be seamless. The school simply replaces the federal Pell Grant with an institutional grant of the same amount. The student’s cost doesn’t change.

What changes is that federal dollars (your tax dollars) go to students at schools that genuinely need the help.

What Are The Objections?

This proposal will no doubt draw sharp criticism from university administrators.

In talking with some industry insiders, the three strongest counter-arguments deserve a conversation.

“Title IV Aid Is a Student’s Money—You’re Punishing Students, Not Schools”

The most common objection I heard is that Pell Grants and federal loans follow the student, not the institution. Under this view, a low-income student admitted to Harvard has the same legal right to a Pell Grant as one attending a community college.

Restricting Title IV at wealthy schools, the argument goes, strips a federal benefit from the students the program was designed to serve.

This sounds persuasive until you look at the math. Harvard’s 2024–25 Common Data Set shows it already provides $249.5 million in institutional grants to undergraduates. Replacing $14.5 million in federal grants (about 5.8% of what Harvard already spends on aid) is trivial.

My proposal requires dollar-for-dollar replacement, so no student loses a single dollar. A student receiving a $7,395 Pell Grant at Harvard would instead receive a $7,395 institutional grant from Harvard. The student’s net cost doesn’t change. What changes is that federal dollars stop flowing to a school with $53.2 billion in assets.

The “student money” framing also ignores the fact that it’s actually the government’s money, and it’s not flowing to where the money could do more good. Only about 16% of students at highly-endowed private universities receive Pell Grants. At community colleges, that figure commonly exceeds 50%. 

Redirecting those same federal dollars means reaching 3 to 4 times more low-income students per dollar spent. The Pell Grant program faces a projected $11.5 billion shortfall – this isn’t about taking benefits away from students, it’s about stretching limited federal resources further.

“Elite Colleges Are Engines of Social Mobility—Don’t Discourage Low-Income Students from Attending”

A more nuanced objection draws Mark Kantrowitz’s insights into undermatching – where low income students are already under-applying to selective colleges. Removing federal aid could create a psychological barrier: even if the school replaces the dollars, the signal is that the federal government doesn’t support low-income students attending elite schools.

But the data actually undermines this argument more than it supports it. At Ivy Plus colleges, more students come from the top 1% of the income distribution than from the entire bottom 50%. Children from the top 1% are 77 times more likely to attend an Ivy Plus school than children from the bottom 20%.

The “mobility rate” (which measures what fraction of a school’s entire student body are bottom-to-top success stories) is actually highest at mid-tier public institutions like CUNY campuses, California state colleges, and University of Texas schools. These are the schools this proposal would redirect federal funds toward.

Yes, elite schools are effective for the few low-income students who get in. But the federal government gets far more mobility per dollar at the public institutions that serve the overwhelming majority of low-income students.

If Harvard can seamlessly replace a $7,395 Pell Grant with a $7,395 institutional grant (which it demonstrably can based on it’s balance sheet) there is no practical barrier to a low-income student attending. The FAFSA process doesn’t change for the student. The school simply funds the award itself.

“This Sets a Dangerous Precedent—Government Will Weaponize Student Aid Against Universities”

The third objection I heard is political: that giving the government a new lever to restrict Title IV based on institutional characteristics opens the door to politically motivated restrictions. And the government is already attacking admissions policies and more.

This argument conflates objective financial criteria with political targeting. Means-testing based on endowment-per-student ratios is no different in principle from means-testing individuals based on income—something the federal government already does across 80-plus programs spending over $1 trillion annually. The threshold is financial and quantifiable, not ideological.

The slippery slope concern also ignores that the government already sets multiple financial benchmarks that determine Title IV eligibility.

Schools must maintain acceptable cohort default rates, meet financial responsibility standards, and comply with ROI rules. Schools that fail those benchmarks lose access to federal aid. 

Adding a financial capacity test for institutions with enormous wealth is consistent with existing practice.

If anything, a clear statutory threshold based on endowment-per-student protects schools better than the current environment, where Harvard saw 350 federal research grants frozen or terminated by executive action in 2025 without any defined financial criteria at all. 

A transparent, legislated standard is the opposite of weaponization – it’s rule of law.The problem is that colleges don’t want to admit what this rule will do: it will encourage colleges to begin supporting students financially. Something the current college tuition crisis has failed at.

Let’s Send Financial Aid Dollars To Where They’re Actually Needed And Stop Giving Handouts To Wealthy Schools

The American social safety net is built on a simple idea: help goes to those who need it.

We don’t give unemployment benefits to billionaires. We don’t give food assistance to households earning six figures. We don’t give Medicaid to people with comprehensive private insurance. Yet we give federal student aid to institutions with more wealth than most countries.

The new endowment tax is a start. It acknowledges that these institutions have accumulated wealth that should be contributing more to the public good. But taxing the endowment while simultaneously sending federal financial aid dollars back to the same schools is contradictory. 

Congress should take the next logical step: means-test colleges the same way we means-test Americans. If your endowment is generating profits, use that money for your students.

Let federal financial aid money flow to the schools and students who actually need it. 

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