Princeton University’s federal endowment tax bill is projected to jump from about $39 million a year to roughly $223 million under a 2025 law that scrapped the flat 1.4% rate and replaced it with a tiered structure topping out at 8%. With a $36.4 billion endowment and about 9,000 students, Princeton sits in the highest bracket. The new rates apply to taxable years beginning after December 31, 2025.
Why Princeton Lands in the Top Bracket
The tax rate turns on a single number: the “student adjusted endowment,” calculated by dividing the fair market value of the school’s non-exempt-use assets by its student count. Princeton’s endowment stood at $36.4 billion as of June 30, 2025.1Princeton University Investment Company. Organizational Model – PRINCO Divided across roughly 9,000 students, that is about $4 million per student, double the $2 million threshold for the highest tier.
Assets Princeton uses directly for its educational mission — classrooms, libraries, dormitories, research labs — are excluded from that calculation, and income they generate is not part of the tax base.2Office of the Law Revision Counsel. 26 USC 4968 – Excise Tax Based on Investment Income of Private Colleges and Universities The tax reaches the investment portfolio, not the campus itself.
The Tiered Rate Structure
Congress overhauled Section 4968 through Public Law 119-21 in July 2025. Rates now scale with per-student endowment:
- 1.4% for a student adjusted endowment of at least $500,000 but not more than $750,000
- 4% above $750,000 but not more than $2,000,000
- 8% above $2,000,000
Each rate applies to the institution’s entire net investment income, not just the slice above the threshold.2Office of the Law Revision Counsel. 26 USC 4968 – Excise Tax Based on Investment Income of Private Colleges and Universities That is a cliff, not a ramp. Crossing the $2 million per-student line means 8% on everything.
A school must also be private and have had at least 3,000 tuition-paying students in the preceding tax year to owe the tax at all. Princeton clears both easily.
What Actually Gets Taxed
The tax base is net investment income. Gross investment income covers interest, dividends, rental income, royalties, and capital gains on the sale of investments. The 2025 amendments added two new categories: student loan interest earned on loans the institution funds from its own assets, and royalty income from intellectual property that students and faculty develop using federal research funding.3eCFR. 26 CFR 53.4968-2 – Net Investment Income
From that gross figure, Princeton subtracts ordinary and necessary expenses tied to producing the investment income — investment management fees, a proportional share of officer compensation for portfolio oversight, outside professional fees, and similar administrative costs.3eCFR. 26 CFR 53.4968-2 – Net Investment Income General university overhead is not deductible. What remains is net investment income, and the 8% rate hits that figure.
Why the Bill Will Move Year to Year
The $223 million projection assumes typical investment returns. The actual annual number swings with the markets. In fiscal year 2024, Princeton’s endowment earned 3.9%. A stronger year produces a larger tax; a losing year produces a much smaller one. Capital losses offset capital gains inside the net investment income calculation, so a serious downturn shrinks the tax base sharply, though interest and dividend income would still generate some liability.
How Princeton Files and Pays
Princeton reports the tax on IRS Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code. Schedule O of that form handles the Section 4968 calculation.4Internal Revenue Service. Internal Revenue Service Form 4720 – Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code The 2025 amendments added new reporting items, including the tuition-paying student count.
The return is due the 15th day of the 5th month after the tax year closes. Princeton’s fiscal year ends June 30, so Form 4720 is due November 15, with a six-month extension available to May 15.5Internal Revenue Service. Return Due Dates for Exempt Organizations: Excise Tax Returns Late filing or payment triggers penalties and interest.
Student counts for the various thresholds use the daily average of full-time students, with part-time students converted to a full-time equivalent basis.6Internal Revenue Service. Excise Tax on Net Investment Income of Private Colleges and Universities The 3,000-student threshold counts only tuition-paying students; the per-student endowment denominator counts all students regardless of whether they pay tuition.2Office of the Law Revision Counsel. 26 USC 4968 – Excise Tax Based on Investment Income of Private Colleges and Universities
A Separate Excise Tax on Executive Pay
The endowment tax is not the only federal excise tax on Princeton’s ledger. Section 4960, also created by the 2017 tax law, imposes a 21% tax on compensation above $1 million paid to any of a tax-exempt organization’s five highest-paid employees, and on certain excess severance payments tied to involuntary departure.7Internal Revenue Service. IRC 4960 – Excise Tax on Excess Tax-Exempt Organization Executive Compensation
Once an employee is a covered employee — by ranking in the top five in any year after 2016 — the status is permanent, even after they leave. The university pays the tax, not the employee. Between Princeton’s investment officers, senior administrators, and highly paid faculty, Section 4960 adds real liability on top of the endowment tax.