Harvard University's main campus Darren McCollester/Newsmakers

The final Republican tax bill did not include some provisions from the House’s version that would have made undergraduates, graduate students and university employees pay more in taxes. But it included a new tax on the university endowments of private colleges and universities with at least 500 students and with assets valued at $500,000 per full-time student. This 1.4 percent tax on investment income will affect roughly 35 institutions including Ivy League universities Harvard, Yale and Princeton.

Higher education advocates are not happy with the new tax. However, this payment pales in comparison to the amounts universities are paying outside managers to oversee their endowment investments. In recent years, institutions have been shifting to “alternative” investment strategies, which mean using outside firms, not in-house managers, to invest their money. The results have been mixed, but in some years, the returns from these high-priced investment managers have underperformed basic stock market index funds.

Hedge funds and private equity firms collectively manage roughly $200 billion worth of higher education endowments.

Institutions are generally tight-lipped about the amount they spend on investment managers every year. But in 2015, University of San Diego law professor Victor Fleischer dug into financial documents and annual reports of several major universities to estimate how much they were paying. Fleisher wrote an opinion piece for The New York Times comparing university investment fees with the amount they spend on student financial aid, revealing that schools including Harvard and Yale spent far more on investment managers than on scholarships. And these higher education are “hoarding” billions of dollars while students are taking out loans to pay expensive tuitions, Fleischer concluded.

Using Fleischer’s data, Mother Jones showed that Harvard, Yale, Princeton and Stanford spent hundreds of millions of dollars on investment manager fees in 2014 while allotting only a fraction of these amounts for scholarship grants.

For Princeton, the new tax on fiscal endowment investment income of 1.4 percent would have amounted to roughly $47.5 million during the 2014 fiscal year. According to Mother Jones, Princeton paid investment managers $546 million in 2014. That’s because investors pay managers a 2 percent annual management fee and 20 percent of the investment income in the form of “carried interest.” Despite promises from President Donald Trump, the new Republican tax bill did not remove the carried interest loophole, which allows finance executives to pay a tax rate on investment income much lower than the standard income tax rate, so managers continue to profit disproportionately from this type of income.

Princeton’s endowment tax during the 2017 fiscal year would have been about $15 million under the new law.

In 2014, Harvard paid investment managers $956 million, and the new endowment tax on its fiscal year 2014 income would have been roughly $21.5 million. The university spent $243 million on scholarships in 2012. For investment income during the fiscal year 2017, the endowment tax would have been about $25 million.

Harvard is largely abandoning its internal investment platform, the Harvard Management Company. HMC investments lost nearly $2 billion in FY2016, and made 8.1 percent in FY2017, which the Harvard Crimson reports was the worst return rate out of almost 20 institutional investors that, as of September 2017, had released their figures.

HMC CEO N.P. “Narv” Narvekar wrote in the fiscal year 2017 report, “Our performance is disappointing and not where it needs to be... The endowment’s returns are a symptom of deep structural problems at HMC and the resultant significant issues in the portfolio.” Narvekar went on to explain why Harvard is willing to pay hundreds of millions of dollars to outside investment managers every year. “While internal management generally generates lower fees and expenses, today’s market landscape makes it ever more difficult to attract and retain top portfolio managers.”

However, Wall Street management of endowments and public pension funds has seen its fair share of criticism.

In the fiscal year of 2016, according to the National Association of College and University Business Officers, university endowments around the nation saw an average return of -1.9 percent. But in 2016, the Dow Jones industrial average grew by almost 5 percent. In the year before, colleges and universities paid hedge funds $2.5 billion in fees to manage their assets. In addition to management fees, some universities have spent still more money to lobby state and federal lawmakers on endowment issues including taxes and mandated annual endowment spending.

New Jersey Gov. Chris Christie put much of the state’s pension fund in the hands of Wall Street managers, tripling the amount of taxpayer dollars that the state paid financial managers from the time he took office through 2014. Despite a promise of “maximized returns” and “minimized risk” from the director of state pensions, the privately managed pension fund underperformed the median returns for similarly sized public pension systems around the country from fiscal years 2011 to 2014, as International Business Times previously reported.

A large portion of Wall Street-managed pension and university endowment cash is stashed the Cayman Islands, a loosely regulated tax haven that allows investment managers to evade taxes and presents the risk that taxpayers or universities could be responsible for losses if the investments go bust or the money disappears.

While universities such as these Ivy League schools reward investment managers handily, they are sitting on tens of billions of dollars that they’re not spending. Fleischer argued that universities, which as nonprofits don’t pay corporate income taxes, should be required to spend at least 8 percent of their endowments each year. Such a requirement could lower tuition, increase faculty research or benefit universities and their education missions in other ways.

The institutions affected by the new endowment tax, according to Inside Higher Education, in descending order of endowment valuation per full-time student are: Princeton University, Princeton Theological Seminary, Yale University, Harvard University, Stanford University, Pomona College, The Juilliard School, Amherst College, Swarthmore College, Massachusetts Institute of Technology, Grinnell College, Williams College, California Institute of Technology, Rice University, Wellesley College, Cooper Union, Medical College of Wisconsin, Dartmouth College, Washington and Lee University, Bowdoin College, University of Notre Dame, University of Richmond, Smith College, Baylor College of Medicine, Icahn School at Mt. Sinai, Emory University, Washington University in St. Louis, Bryn Mawr College, Claremont McKenna College, Trinity University (Texas), University of Chicago.