Financially struggling U.S. colleges are tapping restricted endowments to cover operating costs, raising legal, ethical, and governance concerns.
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Colleges Are Using Restricted Endowments to Stay Afloat as Financial Pressures Intensify
America's higher education sector is entering one of its most difficult financial periods in decades. Across the United States, numerous private colleges are struggling with declining enrollment, rising operating expenses, demographic changes, and growing skepticism over the value of a traditional four-year degree.
According to a recent investigation by The Wall Street Journal, some financially distressed colleges have begun using restricted endowment funds—money legally intended for specific donor-designated purposes—to pay everyday operating expenses. While administrators often view this as a last resort to keep institutions functioning, the practice has triggered lawsuits, donor outrage, and renewed debate over governance in higher education.
What Are Restricted Endowments?
College endowments consist of donated funds invested to generate long-term income.
These gifts generally fall into two categories:
- Unrestricted endowments, which institutions may spend according to institutional priorities.
- Restricted endowments, where donors specify exactly how the money must be used, such as:
- Scholarships
- Academic departments
- Faculty positions
- Research
- Libraries
- Student programs
These donor restrictions are typically legally binding. Universities generally cannot redirect these funds without donor approval or court authorization.
Why Colleges Are Running Out of Money
Several long-term trends are converging to create unprecedented financial pressure.
1. Falling Student Enrollment
The United States is experiencing what education experts call the demographic cliff.
Lower birth rates following the 2008 financial crisis mean fewer college-age students today and even fewer expected over the next two decades.
Enrollment is projected to decline substantially through 2041, particularly across the Midwest and Northeast, where many small private colleges depend heavily on tuition revenue.
2. Rising Operating Costs
Universities face increasing expenses from:
- Faculty salaries
- Technology investments
- Student services
- Campus maintenance
- Insurance
- Healthcare benefits
Many smaller institutions lack the investment income enjoyed by elite universities.
3. Competition From Wealthier Universities
Elite institutions with multi-billion-dollar endowments can offer:
- Larger financial aid packages
- Modern campuses
- Better research opportunities
- Lower net tuition costs
Smaller colleges struggle to compete for students.
Ironically, many wealthy universities also face limits because much of their endowments are legally restricted and cannot simply be spent on any expense.
A Troubling Trend: Using Restricted Funds
The WSJ investigation found that nearly 200 private colleges borrowed from restricted endowments during 2025, a significant increase from earlier years.
Many institutions reportedly used these funds simply to:
- Meet payroll
- Pay utility bills
- Cover operating deficits
- Delay closure
Financial consultants warn that these practices often indicate severe institutional distress rather than temporary cash-flow problems.
The Notre Dame College Example
One of the most striking examples involves Notre Dame College in Ohio.
A donor established a scholarship endowment in memory of her late husband. After the college closed in 2024, she requested that the remaining scholarship funds be transferred elsewhere.
Instead, she learned the money had already been spent on operating expenses.
Ohio's Attorney General later alleged that more than $2 million in restricted endowment funds had been improperly used by former trustees and administrators. Those accused have denied wrongdoing.
Why This Matters for Donors
Donor confidence represents one of higher education's most valuable assets.
When individuals contribute to:
- scholarships,
- research,
- athletics,
- libraries, or
- academic programs,
they expect their donations to support those specific purposes indefinitely.
If institutions begin redirecting restricted gifts, donors may become less willing to contribute in the future.
This could reduce philanthropic support across the entire higher education sector.
Governance Under Increasing Scrutiny
The crisis also raises questions about university governance.
College trustees have fiduciary responsibilities to:
- oversee finances,
- protect institutional assets,
- honor donor intent,
- ensure long-term sustainability.
Experts argue that some governing boards delayed difficult decisions regarding restructuring or mergers, allowing financial problems to worsen before resorting to restricted funds.
Legal Risks Are Increasing
Several U.S. states have strengthened donor protections.
Recent legislation in states including:
- Kansas
- Kentucky
- Georgia
- Montana
makes it easier for donors to pursue legal action when charitable gifts are used outside their intended purposes.
Additional states could adopt similar laws as more colleges face financial distress.
The Future of Small Colleges
Consultants expect additional consolidation throughout higher education.
Possible outcomes include:
- mergers,
- campus closures,
- program reductions,
- workforce reductions,
- asset sales,
- strategic partnerships.
Institutions most vulnerable tend to be:
- tuition-dependent,
- regional,
- small private colleges,
- schools with limited endowments,
- colleges located in regions with declining populations.
Implications for Students
Financial instability affects students in multiple ways:
- Program eliminations
- Faculty layoffs
- Reduced student services
- Delayed campus improvements
- Transfer uncertainty if institutions close
Prospective students may increasingly evaluate a college's financial health alongside rankings and academic reputation.
Implications for Donors
Future donors may:
- request stronger legal protections,
- demand greater financial transparency,
- monitor endowment spending more closely,
- favor financially stronger institutions.
Philanthropic organizations could also tighten oversight of charitable gifts.
Outlook
The financial challenges confronting American colleges are unlikely to disappear soon. Demographic changes, rising costs, and evolving attitudes toward higher education continue to reshape the sector. While tapping restricted endowments may provide temporary relief for struggling institutions, it can also expose colleges to legal disputes, reputational damage, and erosion of donor trust.
For higher education leaders, the challenge will be balancing short-term survival with long-term stewardship of charitable gifts. How colleges respond to these pressures may determine which institutions remain viable in the coming decades.
SEO FAQ
What is a restricted college endowment?
A restricted endowment is a donation that can only be used for purposes specified by the donor, such as scholarships, research, or academic programs.
Why are colleges using restricted endowment funds?
Some financially distressed colleges have used restricted funds to cover operating expenses due to declining enrollment, rising costs, and budget deficits, although doing so may violate donor agreements or legal obligations.
Why are many U.S. colleges facing financial trouble?
Key factors include demographic declines, lower student enrollment, increased operating costs, competition from wealthier universities, and changing perceptions of the value of a college degree.
Can donors sue colleges for misusing donations?
In some states, yes. Recent legislation has expanded legal options for donors seeking to enforce the intended use of restricted charitable gifts.
Source: The Wall Street Journal – The Struggling Colleges Raiding Their Endowments to Pay the Bills
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