Cash-strapped colleges, particularly smaller institutions, are increasingly draining their endowments to survive amidst multi-million dollar deficits and declining student enrollment. According to estimates from higher-education consulting firm Perspective Data Science, nearly 200 private colleges borrowed from restricted endowment funds in 2025, a significant increase from approximately 130 in 2021. This practice is likened to borrowing from a 401(k), offering short-term relief but carrying substantial long-term risks, including potential downgrades to a school's credit rating. For example, Manhattan University drew about 7% of its endowment in fiscal 2024 and another 7% in fiscal 2025 due to deficits, leading S&P Global Ratings to downgrade the school to BBB-, just one level above junk.
Hiram College in Ohio, a 1,000-student liberal arts school, provides a stark example. Faced with deficits, it borrowed more than $47 million from its $56 million endowment, even tapping into funds explicitly set aside by donors for specific purposes. The college is now working with the state attorney general's office on a repayment plan and is notifying donors. David Haney, Hiram’s president from 2020 to 2023, expressed surprise at the loans when he took office, viewing them as a risky gamble many smaller schools feel forced to take. He advocated for expense cutting instead, noting that costly investments like new athletic facilities often fail to resolve underlying financial issues. Despite these measures, Hiram's auditors noted in April that some borrowed money came from restricted funds and expressed "substantial doubt" about the school's ability to continue as a going concern for another year.
The typical assumption for colleges is that endowments grow 7% to 8% annually, with a sustainable draw rate of no more than 5%. However, colleges with endowments between $51 million and $100 million increased their spending rate to 5.5% in 2025, up from 4.1% in 2016. Drawing much over 7% consistently is considered an indicator of an "at-risk endowment." While some institutions, like Avila University in Kansas City, have successfully used endowment funds to stabilize their finances after receiving court approval to loosen restrictions on $6.4 million across 97 funds, others have not. Martin University in Indiana and Notre Dame College in Ohio both closed despite drawing down their endowments. Emily Wadhwani, a higher education analyst for Fitch Ratings, views such actions as a "real red flag." The dismal US birth rate has contributed to a shrinking pool of potential students, leaving smaller, less prestigious institutions struggling while larger universities with endowments over $5 billion remain financially healthy.
