Under the budget reconciliation bill signed by President Donald Trump in July, Notre Dame and other colleges with large endowments will pay higher taxes on their net investment income.
Since January, University leaders have been preparing for that possibility and other changes to higher education resulting from decisions in Washington, D.C.
Notre Dame’s endowment is a collection of about 8,000 individual funds earning income through a highly diversified investment portfolio. Roughly 90 percent of these funds were established by benefactors and restricted for specific purposes such as need-based financial aid and particular academic programs. The remaining 10 percent support the University’s day-to-day operations and the improvement and maintenance of its infrastructure.
The largest share of endowment payout — that portion of investment returns made available each year for spending — goes to financial aid, providing about 85 percent of Notre Dame’s undergraduate, need-based aid overall. During the 2023-24 academic year, endowment payout provided more than $231 million in financial aid to students.
Despite the higher tax, “we have no intention of reducing our investment in undergraduate financial aid,” says Shannon Cullinan ’93, the University’s executive vice president.
A federal tax on some higher education institutions isn’t new. The original tax was introduced as part of the 2017 Tax Cuts and Jobs Act and went into effect in 2018. It imposed a 1.4 percent excise tax on net investment income of private colleges and universities with at least 500 tuition-paying students and endowment assets exceeding $500,000 per student, including those in graduate and professional schools.
The 2017 measure applied to about three dozen private institutions, including Notre Dame. The University has since made tax payments averaging about $12 million a year.
The new law applies to private, nonprofit colleges and universities that enroll at least 3,000 tuition-paying students. Schools with endowments of $500,000 to $750,000 in assets per student will be taxed at the current 1.4 percent rate. Institutions like Notre Dame with endowments of $750,000 to $2 million in assets per student will be taxed at a rate of 4 percent. Those with endowments above $2 million per student — Harvard, Yale, Princeton and a few other schools — will pay an 8 percent rate. The new rates will go into effect in July 2026.
While now in the 4 percent tax tier, Notre Dame could soon move up to 8 percent based on investment income. “It depends on the returns, but right now we’re pushing toward that limit,” Cullinan says.
Under the 4 percent rate, Notre Dame’s annual tax bill is expected to jump to $40 million to $50 million. Moving into the 8 percent tier would result in a tax bill of about $80 million to $100 million a year.
The amount of the endowment payout won’t affect the University’s bill because the tax is calculated on annual net investment income, which includes such items as realized investment gains and noneducational income generated outside the endowment, such as athletic sponsorships and licensing royalties.
In the last fiscal year, Notre Dame spent $607 million from its endowment, providing 43 percent of the annual operating revenues. Endowment payout is the University’s largest source of revenue,
followed by net tuition at 27 percent.
Notre Dame in 2024 expanded its affordability efforts through the Pathways to Notre Dame program, becoming need-blind for all international undergraduate students and extending to that cohort a policy created for domestic students more than two decades ago. The financial aid awards are “no loan,” meaning they fully meet, through grants and scholarships, all undergraduates’ demonstrated financial needs according to federal and independent determinations.
The University also recently increased its stipends for doctoral students. University leaders vow not to pull back from those commitments, despite the dramatic changes coming out of the nation’s capital.
In September, Notre Dame leaders were still working with other faith-based institutions to support legislative efforts to create a religious exemption from the tax. A version of the budget bill that had passed the U.S. House of Representatives in May had included such an exemption, but the Senate parliamentarian struck that provision — ruling it violated the strict standards of budget reconciliation that allow tax and spending bills to bypass the Senate filibuster.
In its most recent annual report, Notre Dame announced a 10 percent return on its endowment for the fiscal year that ended June 30, 2024, matching the average annual return over the past two decades and bringing the endowment’s value to $17.9 billion. The total value of the University’s investment portfolio, including the endowment, working capital and additional assets, was $20.4 billion.
The increased tax and the rate of return will not change Notre Dame’s investment strategy, Cullinan says. If the 4 percent tax had been in effect over the last 20 years, the University’s annual returns would have been about 9.6 percent to 9.8 percent. “I think many people believe the impact would’ve been higher,” he says.
The University established its endowment in the 1920s with a modest sum. It has grown enormously with the aim of supporting students, faculty and staff across generations.
Research universities are already under growing financial pressure because of cuts in funding from the National Institutes of Health, the National Science Foundation and other federal agencies. At Notre Dame, such reductions included the cancellation of some $30 million in direct research funding. The University further anticipates losses of federal reimbursements for indirect research costs and a more challenging environment for securing new federal grants.
Uncertainties about the impact of new international tariff rates are another source of financial stress. In response, the University announced several cost-containment measures earlier this year: a staff hiring freeze, a 2.5 percent overall budget reduction and a pause on launching the construction of any new campus buildings for at least a year.
Cullinan says the budgetary savings realized by those steps will allow a reallocation of resources to other priorities, including financial aid. “A 2.5 percent reduction is hard for people. The upside is you’re investing in students with that,” Cullinan says. “We’re asking everyone to up their stewardship, control costs, deploy innovation and eliminate activities that are no longer necessary.”
Not all gifts to the University go directly into the endowment. Most donations to the annual fund, for instance, are considered unrestricted expendable gifts that help pay such expenses as faculty salaries, utility bills, landscaping, housekeeping and food services. The majority of University expenses are covered by
unrestricted money.
The path of a restricted gift depends upon its size. If a donor specifies that a small gift should go to financial aid, it won’t go into the endowment but will rather support financial aid during that year.
Donors who wish to designate a large gift for a specific purpose work with the development office. The minimum amount to endow a gift toward financial aid, for example, is $100,000. A new fund in the endowment would be set up with that money, which would start generating payout while growing each year.
Some donors like to do both, says Trent Grocock ’89, the University’s vice president of finance. They may give a $25,000 gift for a particular purpose, which is soon spent and has an immediate impact. And they may also give $1 million to create an endowment fund for that same cause. “The endowment’s going to grow and help in perpetuity,” he explains.
Notre Dame has navigated major financial challenges in recent decades — the bursting of the dot-com bubble in 2000, the Great Recession of 2007-09 and the COVID-19 pandemic, Cullinan notes. He attributes the University’s success at overcoming such hurdles to the expertise and support of many people, from administrators and alumni to Notre Dame parents and friends.
“Our long-term plans have served us very well,” Grocock says. The board of trustees holds endowment spending to a certain percentage, and “that keeps us very prudent,” he adds. “We’ve dealt with uncertainty before.”
In response to these latest challenges, the University’s commitment to its Catholic identity and mission will serve as an essential anchor, Cullinan says. “We will continue to approach these times with courage, determination and a care for one another that Notre Dame has demonstrated throughout its history.”
Margaret Fosmoe is an associate editor of this magazine.