Financial Instability Forces Colleges to Double Rate of Raiding Endowments for Operating Costs

The short version: U.S. colleges and universities are increasingly using their endowments to keep the lights on, rapidly accelerating the rate at which they tap these funds for daily operating costs. While massive university endowments often make headlines for their investment returns, the latest financial data reveals a precarious reality for the broader higher education sector, where structural deficits are forcing administrators to liquidate long-term assets.[3]

The primary evidence comes from the National Association of College and University Business Officers (NACUBO) and Commonfund's latest Study of Endowments. The data shows that endowments funded an average of 15.2% of institutional operating budgets in fiscal year 2025.

This represents a sharp escalation. The share of operating budgets funded by endowments was 14.0% in FY24 and just 10.9% in FY23. For many smaller institutions, the reliance is even heavier, effectively doubling historical draw rates to cover immediate shortfalls. Total withdrawals across the 657 surveyed institutions hit $33.4 billion, an 11% year-over-year increase.

The data outlines a clear mechanism driving this shift: declining enrollment, rising inflation, and the exhaustion of pandemic-era federal relief funds have created a structural deficit. To bridge the gap, administrators are turning to their investment portfolios.[2]

However, endowments are not simple checking accounts. They are complex, largely illiquid investment portfolios heavily restricted by donor agreements. The Wall Street Journal reports that in extreme cases, struggling colleges are covering day-to-day bills with funds that donors gifted for specific, restricted purposes—sometimes without the donors' knowledge or consent.[1]

This practice highlights a desperate liquidity crisis. When a college uses restricted scholarship or endowed-chair funds to pay utility bills or general payroll, it breaches fiduciary duties and risks legal action. Yet, the evidence suggests this is becoming a necessary survival tactic for institutions on the brink of closure.[1][3]

The underlying cause is the "enrollment cliff"—a demographic drop in college-aged students stemming from the 2008 financial crisis—which has severely cut into tuition revenue. Simultaneously, the cost of operating a college has skyrocketed.[2]

Institutions face higher costs for faculty salaries, campus maintenance, and student services, while needing to offer massive tuition discounts to attract a shrinking pool of applicants. The NACUBO data shows that 47.4% of endowment spending is directed toward student financial aid, the largest single distribution category.

While using endowment returns for financial aid is standard practice, the rapid increase in the overall draw rate for general operations is what alarms financial analysts. Mercer's analysis of the endowment study notes that while investment returns were strong in FY25, relying on a moving average of market value to fund a growing share of operations is highly risky.

If the market turns, the budget collapses. The evidence regarding the long-term sustainability of this model is remarkably thin. While top-tier universities with multi-billion-dollar endowments can easily sustain a 5% annual draw, the median endowment in the study is only $253.6 million, and over a quarter have less than $100 million.

For these smaller schools, drawing down principal to cover structural deficits creates a mathematical death spiral. Once the principal shrinks, the future investment returns shrink, requiring an even larger percentage draw the next year just to maintain the same dollar amount of funding.[3]

Financial analysts at PNC Institutional Asset Management warn that this growing dependence highlights severe vulnerabilities during periods of market volatility or declining gift flows. The data backs this up: new gifts to endowments fell 9.2% from FY24 to FY25.[2]

Ultimately, the data bifurcates the higher education landscape. Elite institutions are growing their wealth, while regional and small private colleges are cannibalizing their futures to survive the present. For prospective students and faculty, a rapidly depleting endowment is now a critical leading indicator of imminent program cuts, layoffs, or institutional closure.[1][3]