On Tuesday, October 27, 2026, campus leaders sent a financial update to Yale faculty and staff. The following FAQs supplement the message and provide additional background information.
Yale Endowment
Can you explain how the university endowment works?
Over centuries, Yale has benefited from the generosity of generations of donors. The endowment is a collection of their gifts given for a specific purpose and over a broad period of time. The majority of these gifts are highly restricted by the donors, who place legal parameters on how the earnings of endowment funds are used. The original gift (the principal) cannot be spent: it is invested, and the university is required by law to follow the donor restrictions as to how to spend the income from the gift.
The endowment is the university’s largest revenue source and enables much of Yale’s day-to-day operations. Each year, the investment returns on Yale’s endowment fund one-third of the university’s total operating budget and nearly two-thirds of the budget outside the medical school, supporting critical priorities including student financial aid, faculty teaching and salaries, and scholarship and research.
Those interested in learning more are encouraged to visit Overview of Yale’s Endowment and read FAQs.
Endowment tax
What exactly is the increased tax on Yale’s net investment income (“endowment tax”)?
In July 2025, Congress passed legislation (H.R.1, or the “One Big Beautiful Bill Act”) that increased the federal excise tax on Yale’s net investment income from 1.4% to 8.0%, beginning July 1, 2026. This tax is often referred to as the “endowment tax,” though it is actually a tax on realized gains and income from investment assets, including but not limited to those from the Yale Endowment. H.R.1 expanded the investment income subject to this tax to include student loan interest and federally-subsidized royalty income.
The tax is an ongoing expense of approximately $350 million per year that impacts how much endowment Yale can spend. Now, more endowment spending goes to the federal government, and less is available for mission-based activities such as financial aid, research, teaching, and practice.
Why is the cost estimated at over $350 million annually and expected to grow over time? What’s driving that growth?
The federal net investment income (“NII”) excise tax is calculated at 8.0% of the endowment’s net investment income—primarily realized gains, dividends, and interest earned each year—rather than its total market value. As the endowment continues to grow through strong investment performance, over time we expect the amount of tax to increase, even though the 8.0% rate itself remains fixed.
The effective date of the increased tax rate is July 1, 2026. Why is the initial tax payment calculated at the 8.0% tax rate not due until November 2027?
This timing reflects standard federal IRS tax filing due dates. The endowment tax is based on Yale’s fiscal year, which runs from July 1, 2026, through June 30, 2027. The university is required by the IRS to make a payment of the anticipated tax liability to the federal government by mid-November 2027. Any incremental tax owed is paid when we file the university’s federal excise tax return in May 2028.
In the interim, Yale continues to plan and budget for this expense as part of its ongoing financial planning. The multi-year budget reductions described in the
December 2025 and
October 2026 memos were designed with this obligation in mind, ensuring the university has the resources set aside to make the payment when it comes due.
Does the endowment tax still apply in years when the endowment return is flat or negative?
Yale may still pay tax even during years when its endowment experiences overall losses. The tax is calculated based on realized net investment income—including interest, dividends, royalties, capital gains from asset sales, and other sources of income. The endowment return is comprised of unrealized and realized gains and income. It is possible that the Yale endowment could experience an overall loss but still have realized gains and income for the year, which would be taxable.
Endowment return
Will the spending cuts made over the last year be reversed, or do they remain permanent?
The budget targets remain in place. The endowment return doesn’t reverse the cuts, but it does give schools and units added flexibility going forward.
In fall 2025, in response to the increased tax on Yale’s investment income, the university asked each school and unit to reduce its budget target over a three-year period. These revised targets were designed to generate the savings necessary to cover the annual cost of the endowment tax.
Many schools and units met their full three-year target in year one (FY26). This year, deans and other leaders will prepare plans and budgets, reviewed by the
Budget Advisory Group, and have the option to use additional operating funds from this year’s endowment return to support strategic priorities, such as investments in faculty, students, and staff.
Schools and units that have not yet met the full three-year target can apply newly available operating funds toward meeting their target. In this case, those funds would not be available for new investments.
Why can’t Yale simply revise the budget targets to their previous levels? Doesn’t the strong FY26 return and operating surplus in FY27 change the endowment tax burden?
The three-year budget targets were designed to create permanent, structural savings to apply toward the increased endowment tax, which is a permanent, recurring annual cost, not a one-time expense. A strong investment return in a single year doesn’t change this ongoing obligation, so the savings generated by the targets are still needed to cover the tax each year going forward.
In addition, only a portion of this year’s return will be available to spend in the near term. The return will be incrementally incorporated into future operating budgets over the next five years, per Yale’s “smoothing rule.”
The operating surplus generated in FY27, the last full fiscal year before the change in tax rate took effect, is a one-time surplus. Most of the surplus is not held centrally. Instead, it is spread across individual schools, units, departments, programs, and labs, and a good portion is subject to legal restrictions on how it can be spent. The surplus can help schools and units with a one-time tax payment, and can also be used to help make progress toward long-term budget-reduction targets. However, a one-time operating surplus is insufficient to cover the ongoing, annual cost of the tax.
What happens if markets perform poorly in the next few years?
The university’s smoothing rule helps protect the endowment from market volatility. If the endowment were to experience a negative return one year, the effect of that return wouldn’t be reflected in the endowment spending policy for two years—allowing the budgeting process to make gradual adjustments rather than more severe disruptions to the university’s core mission. The negative return would be averaged in over time, just as positive returns are, so that endowment spending would decrease by a smaller percentage in the short run than the investment return might suggest.
Can I access a public version of the final FY28 budget–the first budget year to incorporate recent endowment results–once it is approved in June 2027?
University Budget Books are produced and shared on It’s Your Yale every fiscal year and are designed for readers including Yale’s faculty, staff, and students. Each annual document draws on robust collaboration from deans, directors, faculty, financial leaders, and staff across the campus. University Budget Books provide insight into operating budgets, capital budgets, and university priorities.