The New Tax Law: Explore the Far-Reaching Impacts on Higher Education

The new tax law known as the One Big Beautiful Bill Act includes major changes for higher education institutions. These changes affect endowment taxes, student loan regulations, energy tax credits, Pell Grant rules, and much more.

Explore the far-reaching impacts of the many new tax, financial aid, and regulatory changes for colleges and universities.

Table of Contents

• Repayment Assistance Plan
• Pell Grant changes
• Graduate student loans
• Other financial aid changes
• Information return reporting requirements
• Endowment excise tax
• Executive compensation excise tax
• Energy tax credits
• Employer student loan payments
• Charitable contribution deductions
• Regulatory relief

The new higher education financial aid rules

Repayment Assistance Plan

There is a new income-based student loan repayment plan called the Repayment Assistance Plan (RAP). The rules include:

• Monthly payments are based on adjusted gross income and number of dependent children
• Payments range from 1% of AGI for those earning between $10,000 and $20,000 and then increase by 1% for every $10,000 in income to a cap of 10% of adjusted gross income for anyone earning over $100,000
• Minimum payment of $10 for borrowers earning under $10,000
• Potential for loan forgiveness after 30 years of repayment

Pell Grant changes

Pell grants are eliminated for students who receive scholarships covering their full costs of attendance. New Workforce Pell Grants allows students to use Pell Grants for short-term accredited workforce training programs.

Graduate student loans

Graduate loans will be capped at $20,500 per year with a lifetime limit of $100,000. Professional student loans will be capped at $50,000 per year with a lifetime limit of $200,000. Graduate Plus Loans, used by graduate and professional students, have been eliminated.

Other financial aid changes

Parent loan limits

Parents of students were previously permitted to borrow up to the total cost of attendance minus other forms of financial aid. This has changed to caps of $20,000 per year per student, with a $65,000 lifetime limit per student.

Graduate earnings test

Institutions are now accountable for programs where most students with undergraduate degrees earn less than the median high school graduate. Eligibility for federal student loans will be cut if this earnings test is failed.

Considerations for colleges and universities on the new financial aid rules

Many of the financial aid changes limit access to the type and amount of aid. Institutions should calculate the potential impact of aid being awarded to students and what effect this could have on enrollment. Questions to ask include:

• Can your institution benefit from the Workforce Pell Grant provisions by offering more workforce training programs?
• Will students be able to afford advanced degrees with the caps on graduate and professional student loans?
• What might the enrollment impact be if any programs fail the earnings test?

The new tax rules for higher education

Endowment excise tax

Existing regulations tax the net investment income at a flat rate of 1.4% of private educational institutions with:

• More than 500 tuition paying students, and
• Student-adjusted endowment assets above $500,000 per student

For tax years beginning after December 31, 2025, institutions with more than 3,000 tuition paying students will be subject to the excise tax based on tiered student-adjusted endowment assets as follows:

• $500,000 – $750,000 per student = 1.4% excise tax
• $750,000 – $2 million per student = 4% excise tax
• $2 million per student = 8% excise tax

Other endowment excise tax changes include:

• Net investment income was previously defined as interest, dividends, rents, royalties, and capital gains. It now also includes interest from student loans and federally subsidized royalty income from intellectual property developed with federal funds.
• Institutions will be required to report the number of tuition-paying students and full-time students to the U.S. Department of Treasury. These counts are required to be based on the daily average number of full-time students taking into consideration part-time students on a full-time equivalent basis.
• The U.S. Department of Treasury secretary was directed to issue regulations needed to prevent the avoidance of the endowment tax.

Endowment excise taxes: Get strategies to help with tax hikes

Executive compensation excise tax

Executive compensation excise taxes currently must be paid on the top five current and former employees of an applicable tax-exempt organization compensated more than $1 million in the calendar year as well as certain severance agreement payouts. Effective for tax years beginning after December 31, 2025, the requirement now covers all current and former employees compensated more than $1 million in the calendar year as well as certain severance agreement payouts.

Energy tax credits

The Inflation Reduction Act included a tax deduction for energy efficient commercial construction, and contractors could negotiate with educational institutions to have the credit allocated to their taxable entity. This deduction has been eliminated for construction started after June 30, 2026.

The new tax law also eliminates certain clean energy tax credits — most notably for wind and solar projects — and accelerates the end of solar and wind tax credits. Credits are eliminated for projects beginning after June 30, 2026, and placed in service after December 31, 2027.

Information return reporting requirements

Information return (Form 1099 series) reporting requirements for certain payments of $600 or more (nonemployee compensation, rent, etc.) for a trade or business has been increased to $2,000 or more and will be increased annually for inflation. This threshold change becomes effective for payments made after December 31, 2025.

Employer student loan payments

Employer educational assistance programs currently allow employers to provide a tax-free payment of up to $5,250 toward their employees’ student loans. This was slated to expire January 1, 2026, but instead it was made permanent and will be adjusted for inflation annually.

Charitable contribution deductions

Charitable contributions are an incredibly important revenue source for colleges and universities, and now there are new rules to contend with. They include:

• The charitable contribution deduction for individuals who don’t itemize deductions was made permanent. Individuals who don’t itemize will be able to take an above-the-line charitable contribution deduction of $1,000 or $2,000 for married filing jointly.
• Taxpayers itemizing deductions will be limited to claiming deductions exceeding .5% of their adjusted gross income. Taxpayers in the highest tax bracket will also have their deduction limited.
• Charitable contributions made by corporations will only be allowable in excess of 1% of taxable income, and there will be limitations on carryforward of disallowed charitable contribution deductions.
• All three provisions are effective for tax years beginning after December 31, 2025.

Considerations for colleges and universities on the new tax rules

Clean energy projects

Clean energy projects related to geothermal, fuel cell, and battery storage may still qualify for clean energy credits. Other clean energy projects have a reduced timeline for completion to take advantage of the tax credits.

Endowment excise tax

Institutions with 3,000 or fewer tuition-paying students will get relief from the endowment excise tax. Institutions with larger student populations and endowments will more likely than not pay more excise taxes under the new rules.

Educational assistance plans

Institutions should consider whether they would like to update their educational assistance plans to include a provision allowing student loan payment assistance in addition to the existing educational assistance benefits currently provided.

Charitable contributions

The above-the-line deduction for individuals who don’t itemize is an opportunity to market to a new set of donors who didn’t receive a tax benefit previously. However, the limitations on charitable contribution deductions for corporations and individuals who itemize may reduce contributions.

New regulatory relief for higher education

The new law delays the borrower defense rule and closed-school discharge regulations until July 1, 2035. The closed-school discharges were allowed for borrowers if their school closed while they were enrolled or within a defined period before they left without completing a program. The borrower defense rules made it easier for students to have their federal student loans forgiven if they were “defrauded” by their institutions.

The new law restores the regulations that took effect July 1, 2020, regarding the borrower defense rule and restores the discharge regulations to those in effect on June 30, 2023. These provisions may make it more difficult for students to receive loan relief.

How CLA can help with the impacts of the new tax law on higher education

The new tax law has many major changes for higher education, affecting everything from taxes to financial aid to energy tax credits. There is a lot to understand and adjust to.

CLA can help. Our tax professionals can help you decipher the reporting requirements and clean energy tax credit timelines. Our higher education team can help with financial modeling, strategic planning, and other consulting to help reduce impact.

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