A nearly six-fold increase in the federal endowment tax will hit Yale University’s budget hard, according to the school’s provost, who said it “is currently the most significant challenge” facing the 323-year-old institution. The annual tax rate for the endowment’s income, currently 1.4%, will rise to 8% as of July 1, 2026.
“Unfortunately, we are entering a period of significant financial headwinds,” Yale Provost Scott Strobel wrote in the university’s fall 2025 financial update. “Federal actions are changing the landscape of higher education. These changes will meaningfully reduce funds that comprise key parts of Yale’s budget.”
Strobel said the new tax will substantially increase how much Yale has to pay the federal government on an annual basis, which will result in a sharp “reduction in the funds we will have to support students, faculty, staff, and local partnerships,” Strobel wrote in the update. “The tax is not a reduction in the university’s revenue; it is an ongoing expense of approximately $300 million per year.”
Strobel said the school needs to make sharp cuts to its budget to pay the tax.
Among the moves already made was a 90-day hiring freeze that was lifted October 1. Despite this, the university will take several months to resume hiring due to the backlog created by the freeze. “Each vacancy represents a potential cost-saving opportunity,” Strobel wrote.
He also revealed Yale will adopt new budget targets for fiscal 2027 when the new tax rate comes into effect.
“We have asked unit leaders to implement changes over a three-year period,” Strobel wrote, adding that this will allow time to adjust. During this time, Yale’s Budget Advisory Group will examine how its schools and units will be affected and monitor federal actions, such as “potentially dramatic changes” to its facilities and administrative cost reimbursement rates.
In another move to cut costs, Yale is offering a new, one-time retirement incentive program for managerial and professional staff in fiscal 2026. The voluntary program provides a health care subsidy and two weeks of pay for every year of vesting service, up to a maximum of 40 weeks. It is also offering a union retirement incentive program for its existing contracts with Local 34, Local 35 and the Yale University Security Officers Association.
“We are keenly aware that this process will be difficult, and the results will be felt across every part of Yale,” Strobel wrote, adding that the university will use its recent surplus and reserves to cover short-term deficits. “However, reductions will still be necessary. We must avoid delaying hard decisions and directly address this challenge as quickly as possible.”
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Tags: Endowment Tax, Endowments, Yale University