The bottom line
- Universities with at least 3,000 students and endowments over $750,000 per student face increased excise taxes of 4% or 8%
- New rates apply to tax years beginning January 1, 2026, which may mean July 1, 2026 for many endowments
- BlackRock recommends that taxable endowments do the math: calculate risk and return on an after-tax basis
The recently enacted One Big, Beautiful, Bill ushers in a new era for some larger university endowments who will need to reckon with managing portfolios based on after-tax returns. Shown below are the new tax rates compared to the status quo for endowments, including an important new distinction based on the number of students enrolled. The bill introduces an exemption for endowments of colleges and universities with fewer than 3,000 students. Thus, the managers facing the biggest impact include those at larger universities with big endowments taxed at the 4% and 8% rates, shown in red in the table below.
| 3,000 or more students | Fewer than 3,000 students | |||
| Endowment per student | Current tax rate | New tax rate | Current tax rate | New tax rate |
| < $500,000 | 0.0% | 0.0% | 0.0% | 0.0% |
| $500,000 to $750,000 | 1.4% | 1.4% | 1.4% | 0.0% |
| $750,000 to $2,000,000 | 1.4% | 4.0% | 1.4% | 0.0% |
| > $2,000,000 | 1.4% | 8.0% | 1.4% | 0.0% |
The bill’s new rates will affect tax years starting on January 1, 2026. Since many endowments may operate on a tax year beginning July 1, that means that some may not face a higher rate until July 1, 2026. In the meantime, though, they may benefit from analyzing their existing portfolios and gathering data on the tax impact across various asset classes.
For well-funded endowments facing the 4% or 8% rate, their portfolio managers will still need to shift from a mindset that’s tax-exempt (or nearly so) to one that’s more tax-aware. A tax-aware mindset includes the usual focus on risk, return and fees but also takes account of how taxes materially affect returns. For any taxable investor, after-tax returns are the only ones that matter.
Action items
As a first step, endowments facing higher tax rates need to gather data on their portfolios to estimate future tax impact. They should also identify liquid assets where realizing gains at current, lower rates may prove beneficial, especially for assets with unrealized gains that are likely to be sold in the next few years. For instance, for a concentrated position or an active manager that may likely be dropped, selling at a lower rate now may be advantageous over waiting and paying a higher rate in future. Similarly, if an endowment anticipates additional liquidity pressure over the next few years, then realizing gains now may also be warranted.
The second step for endowments facing a rate increase is to analyze the entire portfolio from an after-tax perspective, as some asset classes or strategies may shift in how comparably desirable they are under a higher rate. For example, an asset class like private equity, whose returns may be realized only after a long waiting period, may in general become more attractive on a comparative basis after-tax than an asset class like private credit, which tends to distribute income regularly.
How might an endowment analyze its after-tax asset allocation? A 2015 Financial Analysts Journal article, “What Would Yale Do If It Were Taxable?” details how endowments can compare risk-adjusted portfolios after taxes. Applying individual investor tax rules to Yale's asset allocation showed that accounting for taxes can radically alter optimal weights, eliminating some asset classes like active equity and hedge funds but then restoring them when direct indexing was included.
For large endowments facing an 8% rate, the tax impact is smaller than for individuals. Consequently, assets like municipal bonds offer less benefit. Similarly, while standard direct indexing (DI) can boost after-tax returns for some high-bracket individuals, its advantage over traditional indexing may be more modest for endowments and may not be appropriate for all institutions. Some endowments may benefit from a more complex version of DI that involves short selling.
While endowments facing the 4% or 8% rates may need to adjust their portfolios, some earlier proposals that didn’t get included in the bill would have made things both more or less challenging for various endowments. For example, there had been proposals for rates as high as 21% and to exclude foreign students from the calculation. There had also been a proposal to exempt religious universities, but that carve-out didn’t get included in the final version. Private foundations had also been facing excise tax rates as high as 10%, but the new law leaves their rate unchanged at 1.39%.
Whatever the tax rate, BlackRock recommends that taxable investors of all types “do the math,” meaning calculate risk and return on an after-tax basis that for an endowment reflects its situation and unique optimal portfolio.