115-97 ) included a new excise tax on the net investment income of certain college and university endowments. For 2017, endowments earned an average return of 12.2%. Spending, or payouts, from endowments supports various higher education activities. On average, in recent years, institutions with the largest endowments have tended to have payout rates that exceeded average payout rates for institutions with smaller endowments. This report begins by providing background information on college and university endowments, and discussing their current-law tax treatment. The report concludes with a discussion of several policy options to change the current tax treatment of college and university endowments. Endowments may also hold cash or property. Tax Treatment of College and University Endowments

Endowments are tax-exempt for one of two reasons. These include the deduction for charitable contributions to educational institutions, estimated to reduce revenues by $10.5 billion in FY2017 (while the deduction is claimed by individuals and corporations, the benefit also accrues to institutions of higher education); private activity tax-exempt bonds for nonprofit educational institutions, estimated at $3.8 billion; and the share of general obligation tax exempt bonds benefits that accrue to public institutions of higher education, which are estimated at around $1.4 billion. To be subject to the tax, private colleges and universities must meet the following criteria: 
1. have at least 500 tuition-paying full-time equivalent (FTE) students in the previous tax year (with more than 50% of these students located in the United States); and 2. have assets of at least $500,000 per student (excluding assets that are used directly in carrying out the institution's exempt educational purpose). National Association of College and University Business Officers (NACUBO) : NACUBO regularly gathers endowment data from a large number of public and private colleges and universities and affiliated foundations. Endowment values decreased substantially during the 2007-2008 financial crisis, and took several years to recover to precrisis levels. As illustrated in Table 1 , endowment balances are heavily concentrated in a small share of institutions, with 12% of institutions holding 75% of endowments. Yale held 4.8% of endowment assets in that same year, with Princeton holding 4.2% of endowment assets. In 2017, the average payout rate was 4.4%. In FY2017, institutions with larger endowments tended to earn higher returns. Table 5 also provides information on the share of assets invested in alternative strategies (which includes hedge funds and private equity). Institutions with larger endowments tend to have a higher share of their endowment assets invested in alternative strategies. For example, is the goal of the policy to encourage colleges and universities to use endowment funds for a specific purpose? Alternatively, the tax could be waived for institutions that meet a fixed payout objective (discussed further below) or as part of a policy requiring increased reporting related to endowments and uses of endowment funds (discussed further below). The tax on net investment returns of private college and university endowments enacted in the 2017 tax revision ( P.L. Endowment earnings could also be subject to tax. Net investment earnings on endowment funds were reported to be $20.3 billion in 2012, or 5.4% of total endowment funds.
Colleges and universities maintain endowments to directly support their activities as institutions of higher education. Endowments are typically investment funds, but may also consist of cash or property. Current tax law benefits endowments and the accumulation of endowment assets. Generally, endowment fund earnings are exempt from federal income tax. The 2017 tax revision (P.L. 115-97), however, imposes a new 1.4% excise tax on the net investment earnings of certain college and university endowments. Taxpayers making contributions to college and university endowment funds may be able to deduct the value of their contribution from income subject to tax. The purpose of this report is to provide background information on college and university endowments, and discuss various options for changing their tax treatment.
This report uses data from the U.S. Department of Education, the National Association of College and University Business Officers (NACUBO) and Commonfund Institute, and the Internal Revenue Service to provide background information on college and university endowments. Key statistics, as discussed further within, include the following:
In 2017, college and university endowment assets were $566.8 billion. Endowment assets have been growing, in real terms, since 2009. Endowment asset values fell during the 2007-2008 financial crisis, and took several years to fully recover. Endowment assets are concentrated, with 12% of institutions holding 75% of all endowment assets in 2017. Institutions with the largest endowments (Yale, Princeton, Harvard, and Stanford) each hold more than 4% of total endowment assets. The average spending (payout) rate from endowments in 2017 was 4.4%. Between 1998 and 2017, average payout rates have fluctuated between 4.2% and 5.1%. In recent years, institutions with larger endowments have tended to have higher payout rates. In 2017, endowment assets earned a rate of return of 12.2%, on average. Larger institutions tended to earn higher returns. Larger institutions also tended to have a larger share of assets invested in alternative strategies, including hedge funds and private equity.
Changing the tax treatment of college and university endowments could be used to further various policy objectives. Current-law tax treatment could be modified to increase federal revenues. The tax treatment of college and university endowments could also be changed to encourage additional spending from endowments on specific purposes (tuition assistance, for example).
Policy options discussed in this report include (1) a payout requirement, possibly similar to that imposed on private foundations, requiring a certain percentage of funds be paid out annually in support of charitable activities; (2) modifying the excise tax on endowment investment earnings; (3) a limitation on the charitable deduction for certain gifts to endowments; and (4) a change to the tax treatment of certain debt-financed investments in strategies often employed by endowments.