Swarthmore College leader warns endowment tax increase could deal a devastating blow

Swarthmore College leaders say a steep increase in the federal tax on endowments under a budget bill pending in Congress would deal the school and other small colleges like it an especially cruel blow.

And the result could hurt students the most, because the college likely would have to cut back its generous financial aid program; about half the money the college spends from its endowment each year goes to financial aid. It is one of few colleges in the country that still provide all grants and no loans in its financial aid packages to students, covering full need for all students who qualify.

“We’re far more dependent on our endowment as a percentage of our operating revenue than larger universities,” said Rob Goldberg, vice president of finance and administration for the highly selective, 1,730-student school in Delaware County. “This particular formulation that the House has passed … is pretty devastating to small colleges, and it would be pretty devastating to Swarthmore.”

A proposed increase in the tax has been approved by the House, and the process has now moved to the Senate.

» READ MORE: Swarthmore College adopts unusual three-month budget given federal funding uncertainty

Swarthmore is working with a coalition of 25 small private liberal arts colleges nationwide, including Haverford and Bryn Mawr Colleges, to urge lawmakers to exempt small colleges below 5,000 students from increases in the tax.

“We’re not saying we don’t want to pay the tax at all. We’re just saying keep us where we are,” Goldberg said.

Bryn Mawr currently pays the tax; Haverford does not, but is close to the threshold.

» READ MORE: Penn, Bryn Mawr, Swarthmore warn increases in the endowment tax could harm financial aid, other programs

Under the current requirement enacted during President Donald Trump’s first term, colleges pay the tax if they meet the threshold of having at least 500 tuition-paying students and an endowment that is larger than $500,000 per student. Public colleges are exempt. Congress enacted the tax in 2017 as critics eyed the large endowments of some universities, which also carry high price tags for students.

More than half of Swarthmore’s $220 million operating budget is funded by endowment earnings revenue. At the much larger University of Pennsylvania, by comparison, it is 20% of the school’s annual academic operating budget. (Princeton, another Ivy League university, however, uses endowment returns to fund 55% of its nearly $3 billion annual operating budget, according to the Chronicle of Higher Education, which noted the school would face a 21% tax under the current proposal.)

Swarthmore also receives much less federal research funding than big universities, Goldberg said.

And earnings on Swarthmore’s $2.7 billion endowment stands to be taxed at a higher rate than earnings on Penn’s $22.3 billion endowment under the House bill. Penn’s would be taxed at 7% and Swarthmore’s at 14%, though Swarthmore likely would move into the top bracket of 21% if international students are pulled out of the calculation as the current bill advocates, Goldberg said.

Under the proposal, colleges’ tax rate would be based on the size of their endowment relative to their U.S. student enrollment. Those with an endowment of $500,000 to $750,000 per student, for instance, would pay 1.4%, while those with more than $2 million per student would pay 21%.

Swarthmore, like other colleges that qualify, currently pays 1.4% on its endowment gains under the tax. At Swarthmore, that equates to $2 million.

If the tax increases to 14%, the college’s tab would rise to $20 million. If it is 21%, it would be $30 million.

» READ MORE: Tensions rise on local campuses as Trump targets international students

And that would be on top of other financial impacts from federal policy, including termination of a handful of grants totaling about $1 million, potential changes in guidelines for Pell Grants for students from lower-income families, and the targeting of international students, which could prevent some from getting their visas and scare others away. About 15% of Swarthmore students are international.

The college recently adopted an unusual three-month budget, given the financial unpredictability.

“In light of these financial uncertainties, and to avoid overcorrecting before we have a clearer picture of the conditions shaping the college’s finances, the board decided to move forward with an interim operating budget to carry us through the first three months of the new fiscal year,” Swarthmore president Valerie Smith told the campus community last month.

Goldberg said taxing Swarthmore at such a high rate seems counterproductive to the goals of the federal administration. Even the White House website, which heralds the “wins” in the “One Big Beautiful Bill,” says the legislation will hold “woke, elitist universities accountable by increasing the endowment tax on large universities.”

Swarthmore is not a large university.

The college prides itself on graduating 94% of its students in six years with an average debt load of $16,000.

“We think those are the outcomes that Congress and the American people are looking for, and we’re doing all that,” Goldberg said.

If the government eats away at its endowment earnings, students will be faced with taking on more debt, Goldberg said. He is unsure the college would be able to maintain its all-grant, no-loan status.

“We would have no choice but to look at our financial aid program as a way of paying that tax,” he said.

Thirty million dollars, he said, is equivalent to 420 scholarships, based on Swarthmore’s average aid package of $72,100. The college doled out over $60 million in financial aid in 2024, with about 900 students receiving aid. Tuition, fees, and room and board at Swarthmore will top $90,000 next year.

The college also provides students with free SEPTA passes and includes borough restaurants and supermarkets in its student meal plan so that $1 million a year is spent there, Goldberg said.

In addition to financial aid, Swarthmore spends its endowment on debt service, facilities maintenance, and operations. The school draws between 3.5% and 5% a year from the endowment; the average draw for colleges nationally is 4.8%.

The school would have to look for cuts elsewhere in its budget if it is suddenly taxed at 14% or 21%, Goldberg said.

“You have to make trade-offs, and we’re now thinking through like what those trade-offs could mean,” he said.

About 65% of Swarthmore’s endowment is restricted, meaning it must go for purposes specified by donors. The other 35% is not, but Goldberg said the college would not want to raid that to cover an endowment tax because that would harm its future financial position.

“We have to steward this endowment to live in perpetuity,” he said. “Students 10 or 20 years ago benefited from the endowment. … We have to make sure students 10 to 20 years from now benefit from the endowment. The more you take out of the endowment to fund today’s needs, the less you’re going to have available to support students in the future, and that’s not fair to them.”