Article Summary: OBBBA Provisions Affecting Higher Education
The One Big Beautiful Bill Act introduces higher endowment taxes, new charitable giving limits, an expanded executive compensation excise tax and lower federal student loan caps affecting colleges, universities, students and donors.
- Endowment Tax: Private colleges and universities now face a graduated 1.4%–8% excise tax on net investment income, up from a flat 1.4%.
- Charitable Giving: New AGI and income floors reduce the benefit of small donations, while a new non-itemizer deduction may broaden the donor base.
- Executive Pay: The Section 4960 excise tax now applies to any employee earning over $1 million, not just the top five earners.
- Student Loans: New borrowing caps, including a $257,500 lifetime limit, may create funding gaps for graduate and professional students.
The One Big Beautiful Bill Act (OBBBA) includes several provisions that could significantly affect colleges, universities, students and donors. The changes described below focus on tax provisions related to higher education, as well as charitable giving incentives and federal student loan access.
Increased Tax on Institutional Endowments
OBBBA increases the excise tax on net investment income for certain private colleges and universities. The excise tax applies to educational institutions with at least 3,000 tuition-paying students in the past year, with at least half of those students in the United States, and a minimum student-adjusted endowment of $500,000.
Prior law: Under the prior rules enacted by the Tax Cuts and Jobs Act, the endowment excise tax generally applied at a flat 1.4% rate to certain private colleges and universities with at least 500 tuition-paying students and endowment assets of at least $500,000 per student.
The law introduces a graduated tax structure based on endowment size:
- 1.4% for endowments between $500,000 and $750,000
- 4% for endowments between $750,000 and $2 million
- 8% for endowments exceeding $2 million
This increased tax burden could reduce the net investment income available to fund operations, financial aid, and long-term institutional initiatives.
Changes to Charitable Giving Incentives
The OBBBA also changed the tax treatment of charitable contributions, which has indirect but meaningful consequences for higher education institutions.
For individual taxpayers, the law introduces a 0.5% of adjusted gross income (AGI) floor, meaning that contributions below that threshold are no longer deductible. For corporations, a similar 1% taxable income floor applies.
Prior law: Before these changes, itemizing individuals generally could deduct charitable contributions without a 0.5% AGI floor, and corporations were not subject to a 1% taxable income floor before claiming a charitable deduction, though existing percentage limitations and carryforward rules still applied.
These changes reduce the immediate tax benefit of smaller donations and might discourage incremental giving. As a result, taxpayers might evaluate alternative giving strategies, such as consolidating charitable contributions into a single year or leveraging donor-advised funds (DAFs), to achieve greater tax efficiency under the revised rules.
Non-itemizing taxpayers are now allowed to claim up to $1,000 ($2,000 for married filing jointly) for charitable contributions each year. This could incentivize charitable giving across all income brackets, potentially expanding an institution’s donor base.
Expansion of Executive Compensation Excise Tax
The OBBBA expands the 21% excise tax under Internal Revenue Code Section 4960 by broadening who may be treated as a covered employee of a tax-exempt organization. Rather than applying only to the five highest-compensated employees, the tax may apply to any current or former employee with compensation over $1 million, subject to existing exceptions such as remuneration paid for medical services.
Prior law: Section 4960 generally applied the 21% excise tax to compensation over $1 million or excess parachute payments paid to the organization’s five highest-compensated employees for the year, or individuals previously treated as covered employees.
New Limitations on Federal Student Loans
Effective July 1, 2026, the OBBBA imposed new federal borrowing caps on graduate, professional, and Parent PLUS loans and phases out Federal Direct PLUS Loans for graduate students.
Prior law: Graduate and professional students generally had access to Federal Direct PLUS Loans to help cover cost of attendance remaining after other federal aid. Parent PLUS Loans could generally cover up to the full cost of attendance, reduced by other financial aid, and there was no separate Parent PLUS aggregate borrowing cap per student.
The revised limits include a $257,500 lifetime federal borrowing cap, with graduate students limited to $100,000 in aggregate borrowing and professional students limited to $200,000. Parent PLUS Loans are capped at $20,000 annually and $65,000 in the aggregate, per student.
These changes may create funding gaps for students in high-cost graduate and professional programs, particularly where students previously relied on Graduate PLUS Loans or Parent PLUS borrowing to cover the full cost of attendance.
Key Takeaways
Overall, the OBBBA introduces new financial and tax considerations for colleges and universities, making strategic planning around endowments, executive compensation, debt, and philanthropy more important than ever.
About Schneider Downs Higher Education Services
The Schneider Downs Higher Education industry group is a dedicated team of experienced professionals specializing in serving institutions from high schools to universities. Our experience in audit and assurance, tax advisory, technology and data and more allow our professionals to stay ahead of the latest trends, developments and challenges within the education sector and provide timely and practical solutions to our clients.
