While most colleges and universities are dealing with funding problems, schools with only $50 million to $100 million in assets are facing the biggest issues. To cope, more small schools are increasingly relying on their restricted endowment funds — money donors have limited to specific purposes, such as scholarships, faculty positions, or particular programs — to cover increased costs.
Endowment spending has risen over the past couple of years, with the annual spending rate for all colleges and universities reaching 4.9 percent in fiscal year 2025. For institutions with no more than $100 million in assets, it’s 5.5 percent.
As more schools lean on their overall endowments to cover increased costs, a larger cohort is dipping into these restricted funds — sometimes without even realizing, because they don’t have the systems infrastructure to support a separation.
Analytics firm Perspective Data Science estimates that nearly 200 private colleges borrowed from restricted endowment funds in 2025, up nearly 54 percent from the roughly 130 in 2021. John Griffith, a director at Hirtle & Co., argues that there’s a smart way to do this without violating donor demands or the law.
“What you want to do is spend more from your restricted endowment and less from your unrestricted endowment,” Griffith told Institutional Investor over the phone.
Restricted funds have to be used for specific purposes, but unrestricted funds can be used for almost anything. So, if a school can legally spend more from their restricted funds to try and preserve and grow its unrestricted assets, Griffith says they should. It’s the unrestricted pool that gives the institution its long-term financial strength.
The size of the unrestricted endowment determines how much credit a school can tap. But when they spend unrestricted net assets to fund current operating issues, they take away from the collateral needed to borrow funds — and long-term capital. The Hirtle endowment specialist suggests organizations use restricted funds whenever they have eligible expenses that satisfy the donor’s restrictions. That protects the earnings of the unrestricted endowment, allowing them to reinvest those funds.
“You're satisfying the donor restriction and preserving your unrestricted assets for the future,” Griffith said.
While the larger, more well-endowed institutions have always used this strategy of underspending from unrestricted assets and spending the restricted pool at a higher rate, smaller schools have held off until recently. And Griffith thinks this is “just really good balance sheet management. There's no reason anyone couldn't use it.”
The endowment specialist at Hirtle noted that this is “much more of a long-term strategy.” Schools can’t raise unrestricted assets overnight. “You need time for the unrestricted endowment to compound while spending slightly more from your restricted funds,” he said. “You don't really get too much short-term relief.”
A Challenging Time for Higher Ed
It’s been a challenging time for higher education, particularly for the smaller and midsized schools. Costs are up while tuition revenue is down. Operating margins are thin. Government funding is being withheld. Debt has also become tougher to obtain as banks become more reluctant to lend to schools.
While spending has increased, strong returns have insulated endowments from any deep depreciation. The issue, of course, is what happens when — not if — an inevitable drawdown occurs. And Griffith thinks most schools are not prepared for a market downturn.
“It's important to get asset owners to plan for what to do if the endowment drops,” Griffith said. “If net tuition is flat or going down, you've got to get more out of your endowment.”
Colleges may start looking for more creative ways to use restricted endowment money — on facilities and deferred maintenance, for example. However, that raises legal and fiduciary questions about whether trustees are serving the institution’s survival or the donor’s original intent.
Some schools have already hit that tripwire by borrowing against their restricted assets without getting the proper court or donor approval — and facing legal consequences.
Matthew Hendricks, founder and CEO of Perspective Data Science, told II that some schools that borrow from their restricted assets don’t even realize they’ve done so until later, usually at the end of the fiscal year or through an audit. There’s no legal requirement to place restricted funds in separate accounts, so when liquidity gets tight (particularly in the summer), schools often use whatever’s in the bank to make payments.
While tapping into these restricted funds can often be unintentional, especially with smaller portfolios, Hendricks noted that still, “There are some that intentionally did borrow but didn’t get proper approval.”
For example, Quincy University withdrew $6 million from endowments for cashflow in 2025 without the Illinois attorney general’s approval, while Baldwin Wallace University in Ohio transferred about $20 million in restricted donor funds that year without proper permission from its trustees. (Quincy President Brian McGee has pushed back against allegations of wrongdoing, arguing the school “did the right thing at every turn” and that borrowing against endowments is standard practice amongst “hundreds of colleges and have borrowed against their endowments.”) Also in Ohio, the attorney general filed a complaint against Notre Dame College (not to be confused with the University of Notre Dame in Indiana) accusing the now shuttered college of misusing $2.1 million in restricted endowment funds to pay off its debts without obtaining approval from the AG’s office.
“Some schools are under the impression they can borrow against these assets without court approval, which is just not true,” Hendricks explained. “They don’t have the authority to release restricted assets like that, so that’s up to the donor or judge in that state.”
Hendricks added: “It’s a crazy time for higher ed at the moment, that’s for sure.”
