Congress’s newly passed reconciliation bill, H.R.1, introduces sweeping changes that will reshape education financing, nonprofit operations, and endowment management. Here we summarize key provisions and implications for these segments.
Higher Education: Affordability, Access, and Accountability
Pell Grants offer federal aid to help low-income students pay for college costs, which increases access to higher education to a broader student population. It is estimated that nearly one third of all undergraduate students are Pell Grant recipients. There are two key changes to the program included in the final H.R.1 bill: Eligibility of funding will expand to include students in short-term workforce programs; and Pell Grant funding will no longer cover indirect costs such as fees, room, and board, which may impact a student’s ability to bear the full financial cost of attending school. The final bill did not include proposals in prior versions of the text, including cuts in maximum funding levels for each student, and increased credit hours required for eligibility (from 12 to 15 credit hours).
Other cuts to federal aid for students include eliminating the Grad PLUS federal loan program, and the bill caps total graduate borrowing levels and puts new restrictions on other borrowing programs, such as Parent PLUS loans. These provisions will likely dampen enrollment among previously eligible populations as options for student-oriented financing narrow. The bill also limits the options for repaying existing student loan debt, replacing existing income-driven plans with only two, more restrictive, options.
The bill will strip federal loans for programs where graduates earn less than the state median for high school graduates, modeled off existing gainful employment rules, which may impact enrollment or the availability of certain course offerings.
Endowment Management: Additional Financial Burden on Limited Set of Schools
As we wrote in a prior article:
“The long-standing tax exemption on endowment investment income was an acknowledgement of the public good provided by these resources – for example, nearly half of higher education endowment spending funds financial aid. But the tides have turned. In 2017, the Tax Cuts and Jobs Act (TCJA) implemented a 1.4 percent tax on net investment income1or the narrow subset of private colleges and universities with assets over $500 thousand per student, which, as of 2023, applied to 56 institutions.”2
This flat endowment tax will be replaced with the following tiered tax rates:
- 1.4% on institutions with $500K–$749K endowed assets per student
- 4% on institutions with $750K–$1.99M endowed assets per student
- 8% on institutions with $2M+ institutions with per student
According to a Chronicle of Higher Education analysis based on current endowment values, the new tax tiers will apply to 16 or more institutions.3 However, for those select schools, the tax burden will be significant: estimates range from nearly $7 million per year for Brown University to over $200 million for Harvard, Yale, Stanford, and Princeton.4
The passed legislation applies to a reduced number of institutions as compared to the House and Senate proposals because the final text includes an exemption for schools with fewer than 3,000 students, and international students are included in the student count (which total endowment assets get divided by to determine the institution’s tax tier). Further, there is no exemption for religious schools in the final bill.
For a discussion of the endowment tax, listen to our podcast episode, “Navigating Governance and Leadership in Higher Education. For a summary of more key provisions for the higher education sector, see NACUBO’s analysis here.
Note: Most provisions cited go into effect for the 2026-2027 school year.
The Impact on Foundations and Philanthropy Broadly
H.R.1 will increase need among communities across the country by issuing sweeping cuts and policy changes that may make it increasingly difficult for many nonprofit organizations to meet their missions. For example, the Congressional Budget Office estimates that 16 million people will lose health coverage through Medicaid (including children and students) by 2034 and 3.2 million will lose access to food assistance in an average month; Expansion of ICE and ongoing deportations could impact community safety, agricultural business and food prices for consumers; And repealing energy tax credits could impact energy producers, existing investments, jobs and economic growth, and increase energy costs to consumers. Nonprofits operating in support of any of these communities or issue areas may face challenging strategic decisions.
In addition to other new provisions described below, what is most notable from this legislation for the charitable sector is what it did not include: the final legislation omitted any additional excise tax proposed on charitable organizations’ investment income and business assets. It also does not include any changes to Unrelated Business Income Tax (UBIT).
- Charitable deductions: The law changes charitable deduction tax benefits for both itemizers and nonitemizers as described here. Analysis suggests mixed impacts overall – nonitemizers may be incented to increase contributions while nonitemizers may decrease contributions.
- Corporate Giving Floor: This law requires that corporations can only deduct charitable contributions that are greater than 1 percent of their income and denies a tax deduction for corporate taxpayers with charitable contributions below 1 percent of their taxable income. Median corporate contributions as a percent of pre-tax profit are below one percent – meaning many corporations will be disincentivized from continuing the type of giving they have in the past. This provision is estimated to reduce corporate giving by $4 billion annually on average.
For a summary of more key provisions for the charitable sector, see Council on Foundations’ analysis here.
Takeaways for Nonprofit Institutional Investors
- Work within your organization and with external partners to understand the impact these changes may have on your institution, including investments, fundraising, and on the communities your institution serves.
- Convene with partners and membership organizations to share information and best practices to be proactive and mitigate any legal or mission risks.
- Work with your investment team and managers to understand how these changes could impact your institution’s liquidity profile, risk tolerance, and assess alignment within your investment policy.
[1] NII = Cash Dividends + Interest Income + Rental Income + Realized Short- and Long-Term Capital Gains + Royalties
[2] Tax Regime of Higher Education and Nonprofits Set to Change
[3] The analysis includes 16 schools that will be eligible to pay the tax, but the author discloses it may not be a complete list of eligible schools.
[4] Chronicle of Higher Education analysis based on current endowment values.
