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Dear Lisa:
Today, House Ways and Means Chairman Jason Smith (R-MO) initiated the next step in the House budget reconciliation process by unveiling legislation that
will be marked up tomorrow by the committee. While this is a significant step in the process, it is important to note that much could change in the House between the Ways & Means Committee’s markup and floor consideration, as well as when the
Senate drafts its version of a tax bill.
Positively, the bill preserves nearly all the student and family higher education benefits that had been under consideration for elimination and expands IRC Sec. 127 employer-provided education assistance -
a long-standing NAICU priority.
However, the House tax bill increases the marginal rates on private, nonprofit colleges and universities eligible to pay the endowment tax. The bill, however,
does not change the formula determining which institutions pay the tax, but
does exclude international and undocumented students from the per-student count.
Additional bill details
Endowment tax. The current numerical formula is maintained, however only U.S. students will count as part of the formula. This change could
result in colleges with large international student populations now being required to pay the tax, as the per-student asset calculations would rise due to fewer students being counted in the formula. The proposed formula also excludes certain faith-based institutions
from paying the tax.
The tax rate for private, nonprofit colleges with endowment assets per FTE valued at $500 million - $750 million will remain at the current 1.4% level. Marginal tax rates will increase for institutions with
endowment assets per FTE valued between $750 million to $1.25 billion to a 7% rate. Institutions with endowment assets per FTE valued at $1.25 billion to $2 billion will be taxed at a rate of 14%. Finally, institutions with endowment assets per FTE valued
at $2 billion or greater will see marginal tax rates rise to a 21% rate.
Sec. 127 (employer-provided education assistance). The CARES Act expansion that allows annual amounts to be used for student loan repayment
(in addition to tuition amounts) is made permanent and the annual tax free amount of $5,250 will be indexed for inflation moving forward.
Student and Family Benefits. No student or family higher education benefits were eliminated. A Social Security Number will be required for eligibility
for both the American Opportunity Tax Credit and Lifetime Learning Credit.
The tax-free treatment of scholarship and grant amounts (including institutional aid) was maintained.
Bonds. There were no changes to the tax-free treatment of interest on certain bonds. Preventing the elimination of tax-free bonds has been a
top priority for NAICU and represents a major win for private, nonprofit colleges and universities.
Following consideration by the House, the reconciliation process moves to the Senate and the Senate Finance Committee. The Senate could consider a bill similar to the
House version, or a very different bill. Differences will be resolved in a House-Senate conference.
Thank you to those who advocated for these important issues for our sector and held conversations with members and staff over the past weeks and months. This work played
an important role as the committee kept the benefits that help students and families save for college, pay tuition, and repay student loans in the bill.
That said, we continue to stand firm in opposition to the rate increases for the institutions paying the endowment tax. It is important that we continue to make arguments
against the endowment tax policy, as it undermines the public purpose of private, nonprofit colleges and universities and threatens access and affordability for students.
NAICU will monitor the tax bill process closely and communicate any important developments.
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