O ver the past decade, the size and growth of college and university endowments has attracted the attention of academicians and policymakers. In 2008, Senator Chuck Grassley and Representative Peter Welch convened a roundtable discussion entitled "Maximizing the Use of Endowment Funds and Making Higher Education More Affordable." More recently, discussion of endowments featured heavily in a House Ways and Means Committee hearing on "The Rising Costs of Higher Education and Tax Policy." In 2016, the House Committee on Ways and Means held a hearing focusing exclusively on tax-exempt college and university endowments. The 2017 tax revision ( P.L. 115-97 ) included a new excise tax on the net investment income of certain college and university endowments. At the end of FY2017, endowment balances for the 809 institutions included in the National Association of College and University Business Officers (NACUBO)-Commonfund Study of Endowments totaled $566.8 billion. In inflation-adjusted terms, endowment balances trended upwards through most of the 1990s and 2000s. Endowment balances declined sharply during the financial crisis that began in 2008, but subsequently recovered. Strong investment returns have contributed to this growth in endowment balances. For 2017, endowments earned an average return of 12.2%. Over time, an increasing proportion of endowment funds have been invested in "alternative strategies," including private equity and hedge funds. Large endowments are more likely than smaller endowments to have their funds invested in alternative strategies. Spending, or payouts, from endowments supports various higher education activities. The spending rate, or payout rate, has fluctuated over time. For 2017, the payout rate for NACUBO institutions was 4.4%. On average, in recent years, institutions with the largest endowments have tended to have payout rates that exceeded average payout rates for institutions with smaller endowments. This report begins by providing background information on college and university endowments, and discussing their current-law tax treatment. The report then reviews available data and trends related to endowment balances, payout rates, and investment returns. The report concludes with a discussion of several policy options to change the current tax treatment of college and university endowments. A college or university's endowment fund—often referred to simply as an endowment—is an investment fund maintained for the benefit of the educational institution. Endowments may also hold cash or property. Income from the endowment is used to cover the cost of the college or university's operations and capital expenditures, to fund special projects, or for reinvestment. Typically, a college or university endowment includes hundreds, if not thousands, of individual funds that are the result of various agreements between donors and the recipient institution. There are several types of endowment funds. Donors may give funds to a true endowment , or permanent endowment. Oftentimes, donors impose restrictions on the institutions spending the principal balance of true endowments. Donors may also impose restrictions on the use of income earned on true endowments. True endowments may contain funds that the donors have dedicated to scholarships or faculty support, for example. A term endowment is an endowment where funds may be restricted by the donor for some period of time. After the set period of time has passed, unused funds or principal may become unrestricted. Institutions may also put other unrestricted funds, such as those from general gifts or bequests, in the institution's endowment. These funds are typically referred to as a quasi-endowment . Typically, when looking at the total value of an institution's endowments, true endowments, term endowments, and quasi-endowments are included. Of the $566.8 billion in endowment assets reported to NACUBO in 2017, $255.3 billion (45%) was in a true endowment, while $135.4 billion (24%) was in a quasi-endowment. Of the true endowment balance, $233.3 billion was donor restricted (41% of total endowment market value). The reported term endowment balance was $12.3 billion (2%). Endowments are tax-exempt for one of two reasons. Either they are part of a university which is tax-exempt as a 501(c)(3) organization or a government entity (public universities), or the endowment itself has 501(c)(3) tax-exempt status. Contributions to 501(c)(3)s and government entities are generally tax deductible to the contributor under Internal Revenue Code (IRC) Section 170. Another benefit of an endowment's tax-exempt status is that, except for the recent excise tax on the net investment income of endowments at certain institutions, the investment earnings are tax free. The 501(c)(3) status of colleges and universities—and by extension their endowments—is a result of them being organized and operated exclusively for purposes listed in Section 501(c)(3), specifically charitable and educational purposes. If the return from endowments of colleges and universities were taxed currently at 35%, the revenue gain is estimated at $15.3 billion; taxed at the new corporate rate of 21%, the amount would be $9.9 billion. If only private universities and colleges were subject to a tax, the gain would be estimated at $10.4 billion at a 35% rate and $6.4 billion at a 21% rate, since public institutions are responsible for 32% of assets. This figure can be compared with the estimated value of other tax provisions that directly benefit educational institutions. These include the deduction for charitable contributions to educational institutions, estimated to reduce revenues by $10.5 billion in FY2017 (while the deduction is claimed by individuals and corporations, the benefit also accrues to institutions of higher education); private activity tax-exempt bonds for nonprofit educational institutions, estimated at $3.8 billion; and the share of general obligation tax exempt bonds benefits that accrue to public institutions of higher education, which are estimated at around $1.4 billion. These benefits total approximately $15.7 billion. Beginning in 2018, the value of these provisions would be expected to be somewhat smaller under the new tax rules. A 1.4% tax on net investment income is imposed annually on certain private colleges and universities beginning in tax years after December 31, 2017. For the purposes of the tax, net investment income is gross investment income and net capital gain, less expenses associated with earning that income. Gross investment income includes income from interest, dividends, rents, and royalties. To be subject to the tax, private colleges and universities must meet the following criteria: 1. have at least 500 tuition-paying full-time equivalent (FTE) students in the previous tax year (with more than 50% of these students located in the United States); and 2. have assets of at least $500,000 per student (excluding assets that are used directly in carrying out the institution's exempt educational purpose). Institutions that are subject to the tax and meet the above criteria are referred to as "applicable educational institution[s]." IRC Section 4968 is a new provision. Per the Conference Report accompanying P.L. 115-97 , it is intended that the Secretary promulgate regulations to carry out the intent of the provision, including regulations that describe: (1) assets that are used directly in carrying out the educational institution's exempt purpose; (2) the computation of net investment income; and (3) assets that are intended or available for the use or benefit of the educational institution. The IRS has not yet released any guidance or regulations related to the new excise tax under IRC Section 4968. The Joint Committee on Taxation (JCT) estimated that the excise tax on net investment income of private colleges and universities with endowments of at least $500,000 per student would raise $1.8 billion in revenue over the 2018 through 2027 budget window. Annually, the tax is estimated to raise about $0.2 billion. Comparisons are often drawn between private foundations and college endowments, particularly when considering certain policy options (payout requirements, for example). Unlike private foundations, college endowments are not subject to a payout requirement. Private foundations are differentiated from tax-exempt public charities by their narrow bases of control and financial support. In order to limit accumulation of tax-exempt funds by foundations, Congress chose to require private foundations (and only private foundations) to pay out at least 5% of their fund every year under Internal Revenue Code (IRC) Section 4942. Private foundations are also subject to an excise tax on net investment income. The tax rate is 2%, but is reduced to 1% if the foundation's qualifying distributions exceed a historical average. When the tax on investment income of private foundations was enacted, Congress stated that the purpose of the tax was to have private foundations share in the cost of government oversight of the sector. Revenues from the tax, however, go to the general fund and are not earmarked for any specific purpose. There are several sources of data on endowment balances. Specifically, data on endowments can be obtained from the following sources: U.S. Department of Education : The U.S. Department of Education publishes data on endowment funds. Generally, information is provided on total endowment funds for all public and private colleges and universities and separately for the top 120 institutions. At the end of FY2015 (June 30, 2015), all institutions reported endowment funds of $547.2 billion.