A college endowment is meant to last forever, sustaining students, faculty, and research in perpetuity. Instead, a growing number of financially strained schools are raiding their nest eggs simply to stay afloat.

Hiram College, a small liberal arts school in rural Ohio, is a case in point. Confronting multi-million-dollar deficits, the 1,000-student institution — home to a statue of U.S. President James Garfield, who once worked there as a janitor to pay his tuition — borrowed from its $56 million endowment and eventually withdrew more than $47 million. It even tapped money that donors had explicitly earmarked for specific purposes rather than for balancing the budget.

Hiram is now working with the state attorney general's office to hammer out a repayment plan, a spokesperson said. The school is also notifying donors about the draw from the endowment, both in writing and through in-person conversations.

David Haney, Hiram's president from 2020 to 2023, said he was surprised to discover the loans upon taking office. He views them as a risky wager that many smaller schools feel compelled to make at a time when U.S. student enrollment has begun to decline. Colleges, he argued, should focus on cutting expenses instead.

"What a lot of these small colleges do is they think that things are going to turn around," Haney said. "'If we just invest in new athletic facilities, everything is going to be fine.' In most cases, that doesn't happen. To me, that's why borrowing from the endowment and taking out debt is not the way to go about it."

A Widespread Practice

Hiram is far from alone. Nearly 200 private colleges borrowed from restricted endowment funds in 2025, up from roughly 130 in 2021, according to estimates from higher-education consulting firm Perspective Data Science. Other colleges have avoided borrowing but are spending more from their endowments each year than advisors consider sustainable. Analysts liken both strategies to borrowing from a 401(k) — it may help in the short term but carries long-term risks, such as a downgrade to a school's credit rating.

For some institutions, "there's just nowhere else to turn," said Tracy Filosa of investment firm Cambridge Associates, which works with endowments. "It's not a rainy day fund — we know that. But in one way, it is there for an institution to get through a rainy day."

Dipping into the endowment can sometimes work, which is one reason schools keep trying it. Avila University in Kansas City received court approval in 2023 to loosen restrictions covering 97 different endowment funds totaling $6.4 million. The school is now on better financial footing, said chief operating officer Andy Jett, and aims to replenish the endowment as it recovers. Avila boosted enrollment by recruiting more international students, though that strategy suffered a setback from the Trump administration's efforts to limit student visas. Even so, Jett said tapping the endowment is not a step to be taken lightly.

"I don't think any school wants to — or should, probably — do this unless they don't have any other options," Jett said. "This wasn't our first choice. This was pretty far down the list of things that we tried."

Shrinking Student Pool

Most colleges resorting to this tactic face the same underlying pressure. The dismal U.S. birth rate has left schools fighting over a dwindling pool of prospective students. The pressures are set to intensify: births fell sharply after the 2008 financial crisis, and that smaller cohort is now reaching traditional college age. Larger, more prestigious universities — many with endowments north of $5 billion — still receive far more applicants than they can admit, keeping their finances healthy. Smaller, lesser-known institutions, by contrast, have endured years of declining enrollment and shrinking income, with no obvious solution in sight. Many have already shut their doors for good.

Indeed, some schools that drew down their endowments — including Indiana's Martin University and Notre Dame College in Ohio — closed anyway.

"When schools take that action, it's meaningful — it can be a real red flag for those of us on the outside looking in," said Emily Wadhwani, a higher education analyst at Fitch Ratings.

How Endowments Work

College endowments can be complicated, with money held across hundreds or even thousands of separate funds. The cash is essentially split into two pots: one reserved for specific donor-designated uses — such as English scholarships or medical research — and the other unrestricted, with few conditions attached. Hiram, for example, had 325 restricted endowment funds, according to a recent audit. State laws governing charitable funds apply to schools as well, so if a college wants to redirect restricted donations to other purposes, it generally must obtain approval from the state attorney general's office, according to law firm Taft Stettinius & Hollister LLP.

Schools generally assume their endowments will grow 7% to 8% per year on average over the long term, according to the American Council on Education, and budget accordingly, trying to draw no more than 5% of the fund's value in a given year. But as financial pressure mounts, many schools with relatively small endowments have been pulling more, data from the National Association of College and University Business Officers show. Colleges with endowments of $51 million to $100 million have raised their spending rate by more than a third since 2016, reaching 5.5% in 2025 versus 4.1% in 2016.

Others have gone higher. Manhattan University in the Bronx drew about 7% of its endowment in fiscal 2024 after facing deficits, and withdrew another 7% in fiscal 2025, according to S&P Global Ratings. In response, S&P downgraded the school to one level above junk — a BBB- credit rating.

"Once you get much over a spending rate of 7%, consistently, you are an at-risk endowment," said Kristin Reynolds of consulting firm NEPC, who advises endowment administrators on investment strategies. She was speaking generally, not about a specific college.

Manhattan University's chief financial officer, James Perrino, said the school's investment returns were significantly higher than 7%, so the draws did not erode the endowment's principal. The money, he said, funded additional student scholarships, campus facility enhancements, and new master's degree programs.

A Way Through — At a Cost

Tapping an endowment can help a school weather hard times or make a strategic investment in its future. For 10 years, Webster University in a St. Louis suburb relied on cash infusions from its endowment to balance its budget and meet loan obligations. The school also reclassified some restricted funds to satisfy bond covenants. Leaders now say they have made it through the rough patch: they've boosted enrollment, invested in international campuses, and removed a "financially distressed" designation from the university's accreditor. Webster has broken even for the past two years without help from its nest egg.

But the stronger footing came at the cost of donor trust, said chief financial officer Bill Donovan, and the administration must now repair that relationship.

"No donor wants to think you're taking their funds just to cover operating losses," Donovan said. "The promise we've made with the new leadership team is that we're not going to do that."

Hiram's Struggle

Hiram is hoping for a similar rebound. Endowment money has helped the college manage persistent deficits, and in an April report its auditors noted that some of the borrowed funds had come from restricted accounts. But the cash infusion has not fixed Hiram's finances: auditors wrote that the school faces "substantial doubt" about its ability to continue as a going concern for another year.

Hiram is working to turn things around. Earlier this year, James Malz, a former JPMorgan Chase & Co. banking executive, was appointed interim president. The school is dropping eight of its least popular majors, including biochemistry and creative writing, and is developing a plan to repay the loans, a college spokesperson said in an emailed statement. It has done so before — in 2022, Hiram repaid more than $6 million in loans from its endowment.

"The College's financial strategy, including the use of endowment-backed financing, was implemented to help manage ongoing operational pressures while the institution developed and advanced a long-term sustainability plan," the statement said. The school has since increased fundraising — with an emphasis on unrestricted gifts — and has no plans to close, according to the spokesperson.

Founded in 1850, Hiram always admitted women and Black scholars, reflecting the egalitarian ideology of its Disciples of Christ founders. Many of its current students are the first in their families to attend college; federal data shows 57% of first-time students there in 2019 received Pell Grants.

"We helped a lot of great students," said Brad Goodner, a professor emeritus of biology and biomedical humanities.

Closing would hurt more than students and faculty, he said. The college is the center of the town — also named Hiram — about 40 miles southeast of Cleveland. Like many small rural colleges across the country, it provides jobs and anchors community life.

"The campus is the village," Goodner said. In a potential closure, "those things would be lost."

This story was originally featured on Fortune.com.