When Endowments Become Life Support, Not Legacy

Executive Summary

The American system of higher education has become divided into two categories: wealthy colleges enjoy high levels of their endowment funds, while a growing number of tuition-based colleges scramble to stay afloat by using these restricted funds as operational capital. In 2025, there were around 200 nonprofits that borrowed against their endowment funds as opposed to 131 just 4 years prior. Furthermore, some organizations seem to be following a trend of withdrawing 7-10% of their endowment funds annually, although it should normally not exceed 4-5%.

This disaster can be explained with three important factors: the inexorable decline of enrollment at colleges, the issues with high discount rates, and inflation. Although UPMIFA was intended to enable colleges to store wealth for subsequent generations, new examples, such as Northland College, struggling with debts of over $22 million of endowment funds, have shown that managing endowment funds can be problematic.

Main point: spending the endowment money to cover up losses does not eliminate the problem but further worsens the situation through a self-perpetuating cycle known as a death spiral, whereby colleges keep running out of assets, getting their ratings downgraded, and losing the trust of the donors. Viable solutions for colleges include beginning to spend less money and consolidating their programs.

Raiding the Vault

The dispersion of finances in American higher education has morphed into a two-tier system. At the top tier are the Ivy League institutions and their mega-endowments, which now reach millions of dollars. In contrast, an increasingly large number of private colleges dependent on tuition income have been viewing restricted financial gifts, or stable income donations that must last forever, as short-term money generation opportunities. In a report published in The Wall Street Journal, nearly 200 private non-profit colleges borrowed money from their pooled endowment in 2025, while there were only 131 such cases four years ago. The report went on to claim that the number of colleges withdrawing as much as 7% or more of their accumulated endowments has grown considerably within the last ten years.

The standard governance of endowments is based on a longstanding tenet of 4-5% of annual expenditures. This rule’s purpose is to ensure the maintenance of the real (i.e., inflation-adjusted) purchasing power over generations to come, and this corresponds to the essence of endowment as a permanent resource of the institution. The recent investigation carried out by the Journal and certain legal actions show the reverse trend. Herewith, it is reported that trustees of various institutions start approving withdrawals of 7-10% and even violate basic capital rules to cover the payroll, debts, and daily needs of operations.

This commentary has a simple point. If restricted endowments start functioning as life-saving tools for institutions, they lose their value as legacy resources.

The Macroeconomic Drivers of Higher-Ed Distress

There has been a coming together of three structural forces for tuition-dependent private colleges that are now beginning to exploit their endowments.

The first issue is the demographic cliff. The group of eighteen-year-olds that is currently the result of the drop in the number of births since 2008 is now in college, and it is reported by Fortune that this demographic crisis manifests itself mostly in a reduction of students in colleges in the Northeast and Midwest, which are the regions that have the largest number of tuition-dependent private colleges.

The second issue is the issue of tuition discounts. According to NACUBO’s latest Tuition Discounting Report, as reported by Higher Ed Dive, the average tuition discount rate in the United States among private nonprofit institutions has been pegged at 57.1% for first-time undergraduates. This means that a dollar of published tuition is usually discounted by at least half before it can make it to the budget. Inside Higher Ed describes this discounting practice as a “structural race to the bottom”: schools raise tuition rates to look prestigious, while they give back most of the money spent in financial aid, which results in the net tuition increase lagging behind inflation.

The third issue comes from inflation affecting expenses. The costs of maintenance, IT systems, insurance, energy, and staff salaries have been rising faster than tuition fees for the last decade. The future negative outlook for the sector by S&P Global Ratings has pointed to the reason for financial distress among small non-profit schools.

In addition to the three economic forces already mentioned, there is also federal policy uncertainty. Moody’s Investors Service has announced an unfavorable forecast for higher education because of changes to federal policy and the possibility of new taxes on endowments. What does three-force compression mean for small colleges? Rather than continuing to function, a small college inevitably faces a cash-flow crisis that leads every CFO to ask the same question out loud: how can we make payroll each August? The answer, of course, is always coming from the endowment.

Endowment Mechanics and Legal Frameworks

The regulations regarding endowment use were written for the opposite of what is happening now. The Uniform Prudent Management of Institutional Funds Act, which was introduced by 49 states and the District of Columbia between 2006 and 2012, establishes the prudent management criteria for endowment usage. The Act does not set any definite threshold level; however, it creates a rebuttable presumption of imprudence if expenditures exceed 7% of the endowment’s fair market value over the last 3 years. Some states, such as Ohio, add a presumable rule of prudence to expenditures below 5%. The provisions have been developed in such a way as to obligate trustees to comply with the principles of intergenerational equity.

An important differentiation exists across the whole legal system. Quasi-endowments are trust-established funds; that is, the restraining power exists in the hands of the founders of these funds, and so the founders can terminate the legal regulation imposed on the funds. Restricted endowments are formed at the discretion of the donor; hence, they can only be released with the donor’s agreement, or with a court decision according to UPMIFA provisions, or by the state attorney general’s actions.

The Wall Street Journal’s newly published investigation illustrates that more trustees have started approving drawdowns that either go above the UPMIFA rule against “rebuttable imprudence” thresholds or, more alarmingly, are made without the requisite acceptance from donors through a court if donor consent isn’t necessary. The Chronicle of Higher Education has been clear about the legal ramifications of this situation: Attention, colleges that are in dire need of cash, be careful when it comes to your endowment funds. The Ohio Attorney General’s 2025 suit against former Notre Dame College officials — accusing them of misusing over $2 million in restricted funds — exemplifies the enforcement issue that exists today. Philanthropy Roundtable has been keeping track of a minimum of “seven violations of donor intent” throughout the industry.

Trustees generally resort to interfund borrowing—they treat as a source of liquidity what should remain untouched—restricted funds’ principal with an intention to pay it off using future operating surpluses, although most of the time no surpluses are realized anyway.

Governance, Ethics, and Fiduciary Duty

Northland College’s case is a prototype of what happens when the above process continues till the point of completion. According to Wisconsin Public Radio, Northland had started borrowing across funds from restricted endowments in 2012 and continued to do so until 2019, finally reaching $22.1 million in loans owing by the middle of June 2024. It managed to declare financial exigency and close its doors in early 2026 when the remaining balance went down to $3.35 million. In its February 2026 court petition submitted to Ashland County, Northland confessed that it had not kept records on which restricted fund was used each time.

The petition sought the court’s help in loosening the constraints on the funds without sufficient records and in approving the distribution of leftover funds to specified charitable groups. In July 2026, the court granted the petition while rejecting donors’ requests to participate in the process, leaving donors like Brett Norgaard disappointed in the college’s failure to comply with their conditions and provide a comprehensive report, while the assistant attorney general noted that the documents available did not suggest WUPMIFA violations.

The outcome in Northland represents the full fiduciary aspect of the situation. There is real conflict between their two obligations: ensuring the organization’s operations continue in the short term (the liquidity obligation) and being responsible for protecting capital for the benefits of the users for many years to come (the duty of intergenerational equity). The two obligations can only be harmonious when the deficit is a temporary affair. If the deficit is caused by structural factors—the demographic cliff, discounting, and inflation—the use of any permanent capital simply creates trouble rather than providing a solution. Spending one dollar of restricted capital to pay this year’s salaries is going to cost the same amount of money next year.

It is precisely this strategic misuse that creates such a negative impact of the practice. When invested wisely, the endowment principal can serve as the necessary funding for real changes, such as curriculum redesign, program consolidation, strategic alliances, or even mergers. In its role of working capital, the same principal ensures the very continuation of the practice that has led to the deficit creation.

The reputational aspect adds to the financial aspect. As soon as donors see a college utilizing restricted principal for unrestricted activities—and once this information reaches donors, alumni boards, and philanthropic publications—future fundraising plummets. The ability to raise funds will suffer as a result of being used for survival purposes.

The Endowment Death Spiral and Institutional Case Dynamics

The mathematics of the death spiral are brutal. Imagine an endowment worth $30 million that has a nominal annual return of 7%. When the fund follows the prudent withdrawal rate of 4.5%, the fund can maintain real value through generations. When the rate is raised to 8%, as reported by the Wall Street Journal, the fund starts to lose purchasing power right away and will have to increase spending in terms of real dollars each year. The loss has a compounding effect. The trajectory has been modeled by Cambridge Associates, and the results show that if an endowment goes significantly underwater, the chance of recovery without infusion of external capital becomes zero in a period of 5 to 7 years.

The secondary consequences are where we can see the effects of the downturn. Trouble at Moody’s with a credit-rating downgrade at the level of 5.7% for Brown University makes it harder to finance projects in debt. Agencies that give out different accreditations view the worsening of the financial situation as a sign of the sustainability of the organization and make them conduct more thorough investigations. The students and their families read magazines about such events and know that interest rates for tuition will drop. Important members of the staff start leaving the organization and apply to a college that has more stability compared to that college. All of these problems are easily solved, but if seen how all of them happen at once, such an organization may find itself in a tough situation.

The comparative analysis gives evidence of a very interesting fact. Such institutions as Hampshire College that started the process of closing down early have more choices than institutions still wasting money and thinking about ways of fixing their finances. Northland College spent all the funds before declaring that it has problems, leaving it with a very small amount of money. The choice here is between admitting that they have problems and finding a way out or closing completely.

The Path Forward

Making use of the endowment principal as a backup for continuous operating losses is not a good tactic for avoiding fiscal downfall. Instead, it shows that the organization has run out of possible scenarios to save itself and is currently making use of its precious financial goodwill to get immediate cash. This will ensure that the power to survive keeps decreasing even faster than the operating losses.

There are no outrageous alternatives to this approach. Early rightsizing, program consolidation to optimize existing institutional operations, genuine merger talks with other colleges before the endowment is depleted, and cooperation with other organizations to reduce spending can all be considered viable approaches that provide the organization with more opportunities to fulfill its mission than using its endowment. It’s the responsibility of the university board of trustees to find the best structural form to fulfill its mission rather than keep the existing structure until all the endowment money is spent.

Using the endowment money means putting an end to the organization’s future. Only board members who can prevent such a situation from occurring can be called responsible fiduciaries.