As explained by the Tax Policy Center operated by the Urban Institute and Brookings Institution:

• Colleges and Universities
  • Most private nonprofit colleges and universities are exempt from taxes due to their status as 501(c)(3) organizations and their educational mission. Institutions typically accumulate endowments to generate income used to supplements tuition and fees, state appropriations, and other funding sources to support the education of undergraduate and graduate students, as well as research, public service, and other institutional activities. Endowments provide a cushion that protects institutional budgets from cyclical pressures, unanticipated changes in enrollments, and other temporary revenue disruptions.
  • The 2017 Tax Cuts and Jobs Act (TCJA) imposed a new tax on a small group of private nonprofit colleges and universities. Institutions that enroll at least 500 students and that have endowment assets exceeding $500,000 per student (other than assets used directly in carrying out the institution’s exempt purpose) pay a tax of 1.4% on their net investment income. The $500,000 threshold is not indexed for inflation. In 2022, the tax raised $244 million from 58 institutions.
  • The some 1,600 private nonprofit and more than 700 public four-year institutions in the U.S. collectively hold over $500 billion in endowment wealth—but 23 of these institutions hold approximately 50% of the assets.
• Private Foundations
  • Private foundations are tax-exempt organizations established by an individual, family, or company for charitable purposes. Unlike higher education institution endowments, which accrue from multiple sources over time (e.g., multiple donors), foundations are required to pay an excise tax on their net investment income (generally 2%).
  • Nonoperating foundations funded by a single or small group of donors which distribute money to others rather than engage themselves in charitable activities, are required to pay out at least 5% of their funds each year. In contrast, operating foundations can receive donations from many donors and primarily operate charitable activities themselves rather than distribute grants. Like higher education institution endowments, they do not have payout requirements.