The Protecting American Students Act (HB1905) amends the Internal Revenue Code to exclude certain students from being counted when determining whether private colleges and universities owe the excise tax on net investment income. Specifically, it adds a new paragraph to Section 4968(b) to exclude students who do not meet the Higher Education Act eligibility standard in 484(a)(5) from the section’s endowment-threshold calculation.
The amendment clarifies that only students meeting that HEA criterion count for the calculation. The bill also creates a reporting requirement on Form 6033 for applicable educational institutions to disclose the number of students counted before and after applying the exclusion.
The effective date is for taxable years beginning after December 31, 2025.
At a Glance
What It Does
Adds a new paragraph to 4968(b) excluding HEA-eligible students from the endowment-count for purposes of the net investment income excise tax. The exclusion applies when determining if an institution has crossed the endowment threshold.
Who It Affects
Applicable private colleges and universities described in 4968(b) that are subject to the tax, and their tax/compliance teams. It also affects the data institutions must report to the IRS.
Why It Matters
This changes the calculation basis for the excise tax, potentially lowering tax exposure for some institutions and increasing transparency through mandatory reporting of counts before and after the exclusion.
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What This Bill Actually Does
The bill targets how private colleges and universities are taxed under the endowment-based excise tax. By adding a new provision to the endowment tax rule, HB1905 says that students who meet the Higher Education Act’s eligibility criteria in section 484(a)(5) are the only students counted when determining whether the institution’s endowment triggers the tax.
In practical terms, institutions will count fewer students when assessing the endowment threshold, which could alter whether a school owes the excise tax on net investment income. The change is designed to be reflected in tax years beginning after 2025, ensuring a forward-looking transition.
In addition, the bill requires private colleges and universities that are subject to the endowment tax to report two counts on their annual returns under section 6033: (1) the number of students counted before applying the HEA-based exclusion, and (2) the number counted after applying the exclusion. This enhanced reporting is intended to improve transparency around how many students influence the endowment tax calculation and how the HEA eligibility criteria affect that count.
The reporting requirement is embedded in a renumbered subsection (o) of 6033, with the same 2025 effective date for applicability.
The Five Things You Need to Know
The bill adds a new paragraph to Section 4968(b) to exclude students who do not meet HEA 484(a)(5) eligibility from the endowment calculation for the excise tax.
The exclusion applies to taxable years beginning after December 31, 2025.
Private colleges and universities must report counts of students counted before and after applying the exclusion on the Form 6033 return.
The reporting requirement targets “applicable educational institutions” described in 4968(b) that are subject to the related subsection (a) requirements.
No new penalties are specified in the bill; enforcement and penalties would follow existing tax regimes if misreporting occurs.
Section-by-Section Breakdown
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Exclusion of certain students from endowment calculation
This section adds a new paragraph (3) to 4968(b). It states that, for purposes of paragraph (1)(D) (the endowment threshold calculation), a student shall not be taken into account unless the student meets the HEA 484(a)(5) eligibility requirements. In other words, students who do not meet that HEA criterion will not count toward the endowment calculation. The practical effect is to potentially reduce the number of students counted in the determination of whether an institution owes the excise tax on net investment income, which could lower taxable exposure for some private colleges and universities. The subsection clarifies how the endowment threshold is measured going forward for taxable years after 2025.
Reporting of endowment-related student counts
This section restructures Section 6033 by redesignating subsections and adding a new subsection (o) (to be (p) after amendment) requiring applicable educational institutions described in 4968(b) that are subject to subsection (a) to report on their return under subsection (a): (1) the number of students counted before applying the new exclusion, and (2) the number counted after applying the exclusion. The effective date mirrors Section 2, applying to taxable years beginning after December 31, 2025. The reporting is intended to provide transparency into how many students influenced the endowment tax calculation and how that count changes with the HEA-based exclusion.
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Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Chief financial officers, tax directors, and finance teams at private colleges and universities subject to 4968(b), who would incur potentially lower tax liability if the exclusion reduces the counted student base.
- Institutional endowment offices and compliance staff responsible for calculating the excise tax base and preparing IRS returns, who gain a clearer, simplified counting framework under the HEA eligibility filter.
- Boards of trustees and finance committees at private colleges with large endowments that may be affected by endowment-tax exposure, as the new rule could change reported tax positions.
- Tax and accounting consultants serving private higher-education institutions, who will need to implement the counting rule and the new reporting requirement.
Who Bears the Cost
- Private colleges and universities will incur administrative costs to determine HEA 484(a)(5) eligibility status for each student and to separate counts pre- and post-application of the exclusion.
- Institutions face added reporting burden and potential data-management costs to populate the new counts on Form 6033 on an annual basis.
- IRS and Treasury administrative costs to implement, monitor, and review the new reporting requirement.
- Small or mid-sized private institutions with limited compliance resources could experience relatively higher relative burden compared to larger institutions with established tax teams.
Key Issues
The Core Tension
The central tension is between using HEA eligibility as a meaningful gatekeeper for counting toward endowment tax calculations and the administrative complexity and potential for inconsistent reporting that comes with requiring dual counts (pre- and post-exclusion) for each institution. On one hand, aligning counts with a defined student-aid eligibility standard promotes fairness; on the other hand, it imposes new data-management requirements and raises questions about how HEA eligibility is established and verified across diverse institutions.
The bill creates a policy change that can reduce an institution’s endowment-tax exposure by narrowing which students count toward the threshold. While this aims to align counting practices with HEA eligibility criteria, it also introduces data-collection and reporting requirements that could be burdensome for some institutions, especially those with large student populations or complex HEA eligibility profiles.
The new reporting on Form 6033 requires careful data governance to ensure counts are accurate and consistent year over year. A potential tension arises if institutions attempt to influence reported counts through actions affecting eligibility status; current law provides no explicit guardrails beyond existing HEA compliance rules.
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