President Trump signed the One Big Beautiful Bill Act (OBBBA) into law on July 4, 2025. The OBBBA will have broad and important consequences for many US taxpayers, including tax exempt organizations and educational institutions.
OBBBA expands and sharpens the excise tax on net investment income for private colleges and universities under Section 4968 of the Internal Revenue Code (IRC). The Act increases on the previous flat rate of 1.4% on net investment income in favor of a new tiered system tied to thresholds based on student population and endowment size, outlined below.
This update explains how these changes will affect application and compliance for private educational institutions by changing relevant definitions, computations, and imposing higher rates.
Expanded Definition of Applicable Educational Institution
Under § 4968(b)(1) pre-OBBBA, an applicable educational institution must be a private college with at least 500 tuition-paying students and assets exceeding $500,000 per student. The House and Finance Committee proposals kept this baseline, exempted qualified religious institutions, and limited applicability to institutions participating in federal student aid programs.
But the OBBBA rejects this framework. Instead, it raises the enrollment threshold to 3,000 tuition-paying students, strikes religious exemptions, and removes the requirement of federal aid participation. Larger institutions will now be subject to Section 4968 excise taxes, regardless of their religious affiliation or receiving federal aid.
Tiered Rates Based on Student-Adjusted Endowment (SAE)
The Act keeps the definition of Student-Adjusted Endowment (SAE) under § 4968(b)(1)(D): total non-exempt assets divided by eligible student count under Higher Education Act § 484(a)(5).
Unlike the House bill (which imposed rates as high as 21%), the excise tax rates for tax years starting January 1, 2026 at the following tiered rates:
- For SAE $500,000 to $750,000, the existing 1.4% rate applies
- For SAE $750,001 to $2,000,000, 4%
- For SAE greater than $2,000,000, 8.0%
Loan Interest and Royalty Income Included in Net Investment Income
Like earlier proposed versions, OBBBA extends § 4968(c) to include student loan interest and certain royalty income, which expands net investment income like the rules for computing NII for private foundations under § 4940(c).
Not Excluded in Calculating SAE
Earlier drafts allowed excluding non-U.S. citizens from eligible student counts for SAE purposes, but the final law does not. The SAE calculation includes all students, both US and international, meaning that institutions with larger foreign student enrollment will have a higher denominator for purposes of determining SAE, translating to a more favorable SAE ratio.
Consequences
Institutions with more than 3,000 students paying tuition must determine whether their SAE exceeds the new thresholds so as to trigger increased excise rates of 4 or 8%. Student loan interest and royalties may inflate taxable net investment income. Without exemptions based on religious affiliation or receipt of federal aid, and with international students and additional passive income types being considered in determining SAE, private colleges may now be subject to significantly increased excise taxes that were not previously subject to excise tax at all.
Steps Your Organization Should Take
- Data Audit. Verify current tuition-paying student figures and compute SAE using 2024 asset data to project applicable 2026 excise rates.
- Modeling. Include excise tax modeling in budgeting and forecasting. Modeling should include financial projections using applicable excise rates that account for investment income, loan interest income, and royalties.
- Asset Review. Consider adjusting asset allocations or reallocating assets for direct educational purposes instead of non-exempt uses to re-balance SAE ratios.
- Reporting. Prepare to complete IRS Form 4720 including tracking and allocating investment income according to the applicable SAE thresholds.
- Governance. Review organizational and governance documents and procedures. Determine whether bylaws, board, or committee charters currently require, or should require, periodic audits related to section
The Act changes the excise tax under Section 4968 by raising SAE thresholds, and instituting a tiered excise tax up to 8%. Affected organizations should audit and model out student population and asset balancing ahead of the January 1, 2026 effective date. We anticipate further guidance and will continue to update.
References
- IRC § 4968 (2025).
- Reg. § 53.4968‑1 to‑3 (2020).
- Higher Education Act § 484(a)(5), 20 U.S.C. 1091(a)(5) (2023).
- One Big Beautiful Bill Act, Pub. L. No. 119‑21 (July 4, 2025).
- Tax Foundation, One Big Beautiful Bill Act Tax Policies: Details and Analysis (July 2025).
- Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code
