FAQs: How the 2025 Net Investment Income Tax (“Endowment Tax”) Rate Increase Affects Harvard University

The “endowment tax” is a federal excise tax on the net investment income of certain large private universities. Introduced under the 2017 Tax Cuts and Jobs Act, it first applied to Harvard in fiscal year 2019. Originally set at 1.4%, the tax applied to interest, dividends, and realized gains from investment assets including, but not limited to, those from the endowment.

The new federal bill passed in 2025 changes the endowment tax in three ways: 

• The rate. The single 1.4% tax rate has been replaced by a tiered structure rising to 8%, based on the size of an institution’s endowment relative to its student body. Harvard is in the top tier and will pay 8%.
• The universities subject to the tax. The tax now applies to institutions with assets that exceed $500,000 per student and with more than 3,000 tuition-paying students.
• What is taxed. The definition of investment income was expanded to include certain royalties and student loan interest.

For Harvard, the higher tax rate will impact endowment distributions made available for operations in fiscal year 2027 (FY27).

The tax on the University’s net investment income will rise nearly six-fold, from 1.4% to 8%. We estimate the higher rate will cost roughly $300 million a year. Because the tax applies to realized net investment income, that amount will vary considerably each year with market performance.

Yes. The endowment is not a reserve held apart from Harvard’s work. It generates income every year that is distributed across Harvard to pay for research, teaching, and financial aid. In FY26, that distribution funded close to 40% of Harvard’s operating budget. The tax will reduce the amount available to distribute. Each dollar spent on the endowment tax is one less dollar available to support faculty research, teaching, and financial aid.

Yes. The tax is assessed on Harvard’s investment income, not investment return. Those are distinct things, and they can move in opposite directions. The University can have a negative return and taxable income at the same time. 

This can happen because the endowment is such a structural part of Harvard’s operations. The endowment distribution that funds Harvard’s work each year is not optional. It funds financial aid, pays faculty salaries, supports research costs, and it is set in advance so that schools can build budgets around it. Harvard Management Company (HMC), which invests the endowment, must generate the cash regardless of market conditions. 

Generating the cash to meet the University’s distribution requirements means realizing gains, sometimes because market securities are sold, often because the funds Harvard invests in sell holdings of their own and distribute the proceeds. Many of the University’s investment holdings have been owned for years, which means a sale can realize a long accumulated gain – and generate a tax obligation – even if the portfolio as a whole has declined.

The result is that in a down year, the University can face a decline in the endowment’s value and a tax bill at the same time – an added cost arriving at a moment when budgets are already under strain.

Harvard has incorporated the anticipated cost of the tax into its multi-year financial planning and endowment distribution guidance.

The University continues to target a total payout rate of about 5% of the endowment’s value each year. That amount must now cover both the distribution to support operations and the tax itself. The tax is estimated to consume between 0.25 and 0.50 percentage points, leaving roughly 4.50%–4.75% available for operations. The aim of this approach is to preserve the endowment's long-term purchasing power while allowing distribution increases to resume in future years as investment performance allows.

In FY27, Harvard is holding the distribution flat compared to FY26 rather than increasing it, to help absorb part of the higher tax. The distribution would otherwise have increased; the increase that would otherwise have supported teaching, research, and financial aid is instead going to pay for the tax.