Effects of the OBBBA on higher education

While H.R. 1, P.L. 119–21, known as the One Big Beautiful Bill Act (OBBBA), extended and instituted a wide range of tax provisions, a number of its provisions directly and indirectly affect higher education. This article explores several of them, discussing related planning measures institutions may take, as well as strategies for individuals making charitable donations to colleges and universities. It also notes OBBBA nontax provisions affecting student loans and federal funding of higher education.

Excise tax on net investment income

One of the more targeted OBBBA provisions affecting higher education is an increase in the excise tax on the net investment income of applicable educational institutions, which include certain private colleges and universities, based on their respective student–adjusted endowments.¹

An applicable educational institution is an eligible educational institution (as defined in Sec. 25A(f)(2) for purposes of the American opportunity tax credit and the lifetime learning credit) that is described in Section 481 of the Higher Education Act of 1965 and eligible to participate in a program under Title IV of that law.² Further, for tax years beginning after Dec. 31, 2025, it must have at least 3,000 tuition–paying students in the preceding year, with more than 50% of those students located in the United States and a student–adjusted endowment of at least $500,000. State colleges and universities are excluded from the definition of an applicable educational institution.³

The excise tax is an applicable percentage of the student–adjusted endowment amount, subject to graduated rates of 1.4% for student–adjusted endowments between $500,000 and $750,000; 4% for endowments exceeding $750,000 but not more than $2 million; and 8% for endowments exceeding $2 million. A student–adjusted endowment is the educational institution’s aggregate fair market value (FMV) of assets as of the end of the preceding tax year, excluding assets used directly in carrying out the institution’s exempt purpose, divided by its number of students.⁴

Provisions affecting charitable donations: Planning strategies

In general, the OBBBA affects charitable donors by implementing floors on deductible contributions, thereby reducing the potential federal tax benefits of charitable giving. Effective for tax years beginning after Dec. 31, 2025, individual taxpayers are subject to a 0.5%-of–adjusted–gross–income (AGI) floor,⁵ meaning itemizers cannot claim a charitable contribution deduction for contributions that do not exceed 0.5% of AGI for the tax year. AGI is calculated without considering net operating loss carrybacks.⁶ For corporate donors, the OBBBA imposes a deduction floor of 1% of taxable income, also effective for tax years beginning after Dec. 31, 2025.⁷ The act makes the existing 60%-of–AGI limitation on individuals’ cash contributions permanent, allowing any excess contributions to be carried forward for up to five years.⁸ Taxpayers whose contributions exceed the 60%-of–AGI limit can also add the amounts disallowed by the 0.5%-of–AGI floor to the excess contribution carried forward. For corporations, contributions are limited to 10% of taxable income, with a similar five–year carryforward for excess amounts.⁹

Example 1: Individual A, a single taxpayer with an AGI of $250,000, donates $105,000 to a local university. Under the OBBBA, the tax–deductible contribution would be $103,750, calculated as $105,000 minus the disallowed $1,250 due to the 0.5%-of–AGI floor.

Example 2: Assume the same facts in Example 1, but with a total donation of $175,000. The tax–deductible contribution would be $150,000, which is 60% of A’s AGI. The excess contribution carried forward will be $25,000, comprising the $1,250 disallowed by the 0.5%-of–AGI floor plus the $23,750 disallowed by the 60%-of–AGI limit.

Following the implementation of the OBBBA, certain tax planning strategies can help maximize the tax benefits of charitable contributions. Some that pertain to higher education (and other charitable organizations) are discussed next.

Bunching donations

Given the charitable contribution deduction floors, donors may benefit from combining multiple years of charitable contributions into a single year. This strategy, known as bunching, helps exceed the deduction floor in the year of the contribution.

Example 3: J, a single taxpayer with an annual AGI of $200,000, makes a five–year pledge of $50,000 to a private university. If J donates $10,000 annually, $1,000 would be disallowed each year due to the 0.5%-of–AGI floor, resulting in only $9,000 in annual charitable contribution deductions, for a total of $45,000 over five years. However, if J bunches the full $50,000 into a single year, the $1,000 disallowance would apply only to that year, making $49,000 deductible, an increase of $4,000 in total tax deductions.

One disadvantage of bunching is that donors might contribute a larger sum sooner than they would have otherwise, potentially missing out on profitable investment opportunities. However, this drawback could be mitigated by using donor–advised funds (DAFs), discussed next.

Donor-advised funds

DAFs are accounts managed by a Sec. 501(c) (3) sponsoring organization, including many colleges and universities or another entity on their behalf. Contributions to DAFs are tax–deductible as charitable contributions in the year they are made, and invested contributions can grow tax–free pending disbursement. Therefore, donors can project future returns, contribute a smaller initial amount, and eventually donate to a university or college a larger sum comprising the original contribution and the accumulated investment gains.

Moreover, donors can help institutions of higher education avoid or minimize the excise tax on net investment income from their endowments by depositing pledged contributions into DAFs until the institutions are ready to use the funds.

Example 4: Donor A intends to contribute $1 million to University X to support a project scheduled to start the following year. University X is subject to the 8% excise tax and plans to place the donation in its endowment fund, which earns a 10% annual return. Assuming no operating expenses, the university would generate $100,000 in investment income from the donation and incur an $8,000 excise tax on that amount. Alternatively, if Donor A pledges the $1 million but places it instead in a DAF with the same 10% annual return until the project begins, the investment would grow tax–free, yielding $100,000 in interest without any excise tax liability.

As previously mentioned, with proper planning, donors can eventually transfer a larger amount to a college or university than their initial contribution by leveraging the DAF’s annual investment returns over time.

Example 5: Assume the same facts in Example 4, except that Donor A plans to contribute $1 million to University X in five years. If the money is contributed to a DAF with a 10% annual rate of return, Donor A can contribute $621,000 at the beginning of Year 1, and University X can receive a total contribution of slightly more than $1 million at the end of Year 5.

Donors should be aware that DAFs may incur certain fees. Some self–managed DAF accounts charge administrative fees ranging from 0.1% to 0.6%, while professionally managed DAFs may impose additional advisory fees of up to 1%. However, these costs are lower than the progressive excise tax rates of 1.4% to 8% applicable to certain educational institution endowments. Additionally, DAFs do not have a required minimum distribution (RMD), allowing donations to be held without tax penalty until they are ready to be disbursed.

Private operating foundation

Donors may also consider making funds available to private universities and colleges via restricted tax–deductible charitable contributions to a supporting private operating foundation. Unlike nonoperating foundations, exempt private operating foundations are not subject to the excise tax on net investment income if they meet the income test and at least one of the following three tests: the assets test, the endowment test, or the support test. The income test requires the foundation to make qualifying distributions directly for the active conduct of activities constituting its charitable, education, or other similar exempt purpose of at least 85% of the lesser of its adjusted net income or minimum investment return.¹⁰

The assets test is met if 65% or more¹¹ of the foundation’s assets are devoted directly to activities constituting the purpose or function for which it is organized or to functionally related businesses, or both, or are stock of a corporation the foundation controls.¹²

The endowment test is met if at least two–thirds of the foundation’s minimum investment return¹³ are distributed directly for the active conduct of its activities constituting its function or purpose.¹⁴

The support test is met if 85% or more of the organization’s support (other than gross investment income) is normally received from the general public and five or more exempt organizations that are not disqualified persons; no more than 25% of the organization’s support is normally received from any one organization that is not a disqualified person; and not more than half of its support normally is from gross investment income.¹⁵

Qualified charitable distributions

Individual taxpayers age 70½ or older can transfer up to $108,000 (for tax year 2025) from their individual retirement accounts (IRAs) directly to a not–for–profit university or college as a qualified charitable distribution (QCD).¹⁶ QCDs are excluded from gross income and are not subject to the 0.5%-of–AGI floor discussed above.

Example 6: A 71–year–old taxpayer with an AGI of $200,000 comprising income of $100,000 from an IRA distribution and $100,000 from other sources would like to contribute $50,000 to a private university or college. If the taxpayer directly contributed $50,000 to the university or college, the donation would be subject to the 0.5%-of–AGI floor, for a total deductible amount of only $49,000. However, as a QCD, the entire $50,000 would be excluded from taxable income.

Although QCDs cannot be contributed to DAFs, they offer the advantage of satisfying RMDs for taxpayers age 73 or older.

Qualified scientific property

C corporations can make contributions of scientific property, known as qualified research contributions, to qualifying universities and colleges for conducting scientific research.¹⁷ A qualified research contribution is tangible personal property described in Sec. 1221(a)(1)¹⁸ constructed or assembled by the corporation and donated within two years of its construction or assembly.¹⁹ The property must be scientific equipment or apparatus for original use by the corporation for research or experimentation or for research training in the United States in a physical or biological science. The recipient institution must use the property exclusively for scientific research, experimentation, or training and is prohibited from transferring it in exchange for money, property, or services.²⁰ Additionally, the university or college must provide the corporation with a written statement confirming that it will adhere to these conditions.²¹

For tax purposes, corporations can deduct the lesser of double the basis of the contributed property or its basis plus half of the amount of non–long–term capital gain income that the donor would incur on the property’s sale.²² Since contributions of qualified scientific property do not directly increase the institution’s endowment, they are not subject to the excise tax on net investment income. Additionally, this type of donation often results in a larger tax deduction for the donor than a cash contribution equal to the property’s basis.

Example 7: Corporation Y manufactures and sells scientific equipment and reported taxable income of $3 million in 2026. The company manufactured 150 surplus units of high–powered microscopes in 2024, and it decides to donate the excess to University X’s science laboratory in 2026. Each microscope cost Corporation Y $800 to manufacture, for a total cost of $120,000. The microscopes have an FMV of $2,500 each, for a total value of $375,000. Corporation Y can claim a charitable deduction of $210,000, calculated as twice the cost basis of the donated property ($120,000 × 2 = $240,000), reduced by the 1% taxable income floor ($3 million × 1% = $30,000).

Example 8: Assume the same facts in Example 7, except that each microscope costs Corporation Y $1,800 to manufacture. Corporation Y can deduct $292,500 in charitable contributions. This is calculated by adding $350, which is half of the $700 excess of FMV over basis ($2,500 — $1,800 = $700), to the $1,800 basis, resulting in $2,150 per unit and a total deduction of $322,500 ($2,150 × 150), minus the 1% taxable income floor ($30,000).

Charitable deduction for nonitemizers

Although the changes introduced by the OBBBA limit certain tax benefits associated with donations to higher education, donors still have opportunities to maximize their charitable contributions. Moreover, the act expands tax benefits to individual donors by allowing nonitemizers to claim deductions for cash charitable contributions. For tax years beginning after Dec. 31, 2025, individuals may claim a deduction of up to $1,000 ($2,000 for married filing jointly) for cash contributions to qualified charitable organizations, including institutions of higher education. This provision has the potential to broaden the donor base by incentivizing charitable contributions across all income brackets.²³

Nontax OBBBA provisions affecting higher education

Limitations on federal student loans

The OBBBA also implemented new limitations on the federal student loan program. For periods of instruction beginning on or after July 1, 2026, graduate and professional students are no longer eligible for Federal Direct PLUS Loans. Additionally, new caps have been placed on the annual and aggregate borrowing limits for Federal Direct Unsubsidized Stafford Loans. Graduate students enrolled in nonprofessional master’s or doctoral programs will be subject to an annual loan limit of $20,500 and an aggregate limit of $100,000, while students enrolled in professional programs will be subject to a $50,000 annual limit and an aggregate limit as high as $200,000.²⁴

Funding restrictions for programs with low-earning graduates

The OBBBA also implements accountability measures restricting federal funding for higher education programs with low–earning outcomes.²⁵ A program is determined to have low–earning outcomes if, for at least two out of the three years immediately preceding the date of determination, the median earnings of its graduates who completed the program four years before the year of the determination are lower than those of a working adult. A “working adult” is defined as someone age 25 to 34 with a lower degree²⁶ who is not enrolled in an institution of higher education. The median earnings will be derived from U.S. Census Bureau data.

Example 9: If students who graduate with a bachelor’s degree from Program A at College X earn median incomes of $40,000 and $45,000 in two of the three years prior to the determination date, while working adults with only a high school diploma earn median incomes of $55,000 and $56,000 during the same years, Program A would be classified as having low–earning outcomes. As a result, College X will be prohibited from using federal funds for ProgramA.

Continuing the mission

Thus, it can be seen that institutions of higher education, their administration, and students are affected in a number of ways by the OBBBA’s provisions. In many cases, however, donors to colleges and universities can use the strategies outlined in this article to optimize the benefit to the donee institutions as well as their own tax liability. In any case, the time–honored mission of higher education of promoting learning and success in professions and all of life remains undiminished.

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Footnotes

¹H.R. 1, §70415, amending Sec. 4968.

²20 U.S.C. §1088, as in effect on Aug. 5, 1997. Generally, these are accredited postsecondary institutions offering credit toward a bachelor’s degree, associate’s degree, or other recognized postsecondary credential that are eligible to participate in U.S. Department of Education student aid programs.

³Sec. 4968(c).

⁴Sec. 4968(d).

⁵H.R. 1, §70425, amending Sec. 170(b)(1)(I).

⁶Sec. 170(b)(1)(H).

⁷H.R. 1, §70426, amending Sec. 170(b)(2)(A)(i).

⁸Sec. 170(b)(1)(G).

⁹Secs. 170(b)(2)(A)(ii) and (d)(2)(B).

¹⁰Regs. Sec. 53.4942(b)-1(c).

¹¹Regs. Sec. 53.4942(b)-2(a)(5).

¹²Sec. 4942(j)(3)(B)(i).

¹³As defined by Regs. Sec. 53.4942(a)-2(c).

¹⁴Sec. 4942(j)(3)(B)(ii).

¹⁵Sec. 4942(j)(3)(B)(iii).

¹⁶Sec. 408(d)(8); Notice 2024-80.

¹⁷Sec. 170(e)(4). Eligible corporations do not include S corporations, personal holding companies, or service organizations, as defined in Sec. 414(m)(3).

¹⁸Stock in trade of the taxpayer or other property of a kind that would properly be included in the taxpayer’s inventory or held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer’s trade or business.

¹⁹Sec. 170(e)(4)(B)(iii).

²⁰Sec. 170(e)(4)(B)(v).

²¹Sec. 170(e)(4)(B)(vii).

²²Sec. 170(e)(4)(B), referencing the limitation at Sec. 170(e)(3)(B).

²³H.R. 1, §70424, amending Sec. 170(p).

²⁴H.R. 1, §81001, amending §455(a) of the Higher Education Act of 1965, 20 U.S.C. §1087e(a).

²⁵H.R. 1, §84001, amending §454 of the Higher Education Act of 1965, 20 U.S.C. §1087d.

²⁶With respect to determinations for an educational program awarding a bachelor’s or lesser degree, a working adult has only a high school diploma or recognized equivalent. In determinations for graduate or professional programs, a working adult has only a bachelor’s degree (20 U.S.C. §1087d(c)(3)).

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Contributors

Iguehi Rajsky, CPA, Ph.D., MBA, is an assistant professor of accounting, and Trey Smith and Jacob Taggart are students, all at Washington & Lee University in Lexington, Va. For more information about this article, contact thetaxadviser@aicpa.org.

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MEMBER RESOURCES

Tax resources

H.R. 1 — The One Big Beautiful Bill Act: Tax Provision Summary & Insights

Tax and Financial Planning Tips: Education Costs

Personal Financial Planning Section

The Adviser’s Guide to Education Planning, 2nd ed.

Education Planning for the Next Decade: Practical Success Strategies (webcast archive)

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