When Notre Dame College, a small Catholic school outside Cleveland, closed in 2024, a widow who had endowed a scholarship in her late husband's name asked for the $30,000 back so she could re-establish it elsewhere. Under the terms of her gift, the money could only support that scholarship. An administrator told her it was not possible. She is a small piece of a growing pattern: nearly 200 private colleges drew on restricted endowment funds in 2025, up from 131 in 2021, according to estimates from the consultant Perspective Data Science, and most used the money not for the scholarships and programs donors had specified but for everyday operating expenses, sometimes without the donors' knowledge or consent.
The instinct is to read this as desperate colleges betraying trusting donors, and in the worst cases it is exactly that. But the situation is more structurally interesting, and more genuinely difficult, than a simple story of villains and victims. It turns on a widely misunderstood fact about what a restricted endowment is, and on a perverse feature of how the restriction is designed: the money that struggling colleges are raiding looks like an available reserve, and its entire purpose is to not be one. Understanding why that is, and where the real wrong actually lies, matters more than the outrage.
A restricted gift is a promise, not a suggestion
Start with what the donor actually did, because it is not what most people picture. A restricted endowment gift is not a donation with a preference attached. It is a binding promise embedded in a transaction: the donor gave money in exchange for the institution's legally enforceable commitment to use it only for a specified purpose, generally in perpetuity. The dollars become the college's property, but the use of them does not; that remains constrained by the terms of the gift and by law. Under the Uniform Prudent Management of Institutional Funds Act, which governs these funds in nearly every state, a school can ordinarily change how a restricted gift is spent only by getting permission, from the donor if living, or from the state attorney general or the courts if the donor has died.
So when a college quietly uses restricted scholarship money to pay the electric bill, it is not making a tough budgeting call within its own resources. It is breaking a promise it made in order to receive the money in the first place, and spending funds it holds but does not have free use of. That distinction, between owning the money and owning the right to use it, is the whole legal and ethical heart of the matter, and it is the distinction the practice erases.
The reserve that is designed not to be a reserve
Here is the perverse structure at the center of the problem. A restricted endowment sits on the balance sheet looking like wealth, an asset, a cushion, and in an emergency the temptation is to treat it as a reserve to draw down. But it is largely the opposite of a reserve. It is money deliberately locked away from general use, and being unavailable for whatever the institution happens to need is not a flaw in the arrangement; it is the entire point of it. The donor restricted the gift precisely so that it could not be redirected to other purposes, however pressing. A reserve is money you can spend when you must. A restricted endowment is money you specifically cannot, by design.
That creates a genuine trap for a struggling college. The institution can appear asset-rich, with a substantial endowment on its books, while being legally unable to use most of that endowment for the one thing it most urgently needs, which is to keep operating. The money is simultaneously right there and off-limits, visible wealth that cannot lawfully be touched for survival. And a dying institution staring at funds it holds but cannot use faces an almost unbearable temptation, because the restriction that makes the money useless for survival is also the only thing standing between the college and using it. The design that protects donor intent in good times becomes, in a crisis, a line that desperate boards are tempted to step over precisely because the money is so close and the need so acute.
The protection fails exactly when it is needed most
Compounding the trap is a timing problem that makes the safeguard weakest at the moment it matters most. A college taps restricted funds when it is desperate, which is to say when it is near closure, and that is precisely the moment when oversight is thinnest and the consequences most irreversible. A board under existential pressure can rationalize the move as temporary; no regulator is watching the daily cash decisions of a small failing college; and the enforcement mechanisms that exist, a donor complaint, an attorney general's investigation, a court action, are slow, and they mostly engage after the money is already spent. Ohio's attorney general, for instance, filed a complaint against fourteen trustees and officers of Notre Dame College alleging they improperly used more than $2 million in restricted funds, but that came after the fact, and the defendants deny the allegations.
The result is that the protection is strongest when it is least needed and weakest when it is needed most. A healthy college with no cash crisis has no reason to raid its restricted funds, so the restriction holds easily. A failing college has every reason to, and the enforcement that would stop it typically arrives only once the funds are gone, and often only once the college itself has closed, at which point the donor's intent has been permanently defeated with little practical recourse. The safeguard is real in theory and hollow at the exact moment of maximum danger.
The word "borrowing" is doing a lot of work
Notice the language that gets used: colleges are said to have borrowed from their restricted endowments. Borrowing implies a loan, something taken temporarily and repaid. But a college dipping into restricted funds to cover operating expenses is, by definition, a college that cannot cover its operating expenses out of its own available money, which makes the premise that it will repay the "loan" largely a fiction. In a declining institution, the trajectory that forced the raid is the same trajectory that ensures the money will not come back.
The euphemism does real work. Calling it borrowing lets trustees tell themselves, and perhaps genuinely believe, that they are not permanently misappropriating a donor's gift but merely bridging a gap they will later close. That reassurance is manufactured rather than earned, because the institution's actual condition contradicts it, and the honest word for spending restricted money you will not replace is not borrowing. Naming the practice accurately is the first step to reckoning with it, and the soft vocabulary is part of how boards avoid doing so.
The genuine dilemma, fairly stated
For all that, this is not a case where one side is simply right, and pretending otherwise misses what makes it hard. Two real goods are in tension.
On one side is the case for honoring the restriction absolutely. The donor gave in reliance on a promise, and breaking it wrongs both that donor and the intended beneficiaries, the students who would have had the scholarship. It also does damage far beyond the single gift, because the entire system of charitable giving runs on trust that restricted gifts will be used as specified. If donors come to believe that a restricted gift can be quietly raided whenever an institution is under pressure, they will give less, or give only unrestricted money, which weakens every nonprofit that depends on donors' willingness to fund specific things. Honoring restrictions even to the point of institutional death can be defended as protecting the credibility of philanthropy itself.
On the other side is the case for flexibility in genuine extremis. If the real choice is between rigidly preserving a scholarship fund and letting the whole college close, then honoring the restriction may destroy the scholarship anyway, along with every other program, every job, and every current student, which arguably serves no one, least of all a donor whose deeper intent was to support the institution's mission. The law itself recognizes this through doctrines like cy-près and equitable deviation, which allow a restricted gift's terms to be modified when the original purpose becomes impossible or impractical, precisely so that a gift can keep doing good when its literal terms no longer can. On this view, using restricted funds to survive, done properly, can be consistent with donor intent broadly understood. Both positions have real force, and the tension between them is not resolvable by slogan.
Where the wrong actually lies
The dilemma becomes far more tractable once you notice a distinction the outrage tends to blur: the difference between redeploying restricted funds with permission and doing it without. The law does not flatly forbid a struggling college from using restricted money to survive. It provides a sanctioned path to do so, ask the living donor, or petition the attorney general or a court, and make the case that the emergency justifies modification. That path exists precisely for situations like these.
So the wrong in the cases that are genuinely wrong is usually not the redeployment itself, which the law can bless. It is the circumvention, using the money unilaterally and quietly, without the consent the law requires, because the proper process is slow and might say no. That is the line between a difficult but defensible act of stewardship and a breach of duty. A board that goes to the attorney general and argues for equitable deviation is doing something the system contemplates; a board that raids the scholarship fund and hopes no one notices is defeating the very safeguards built to protect donor intent. The Iowa Supreme Court underscored the principle this year, holding that any modification of donor-restricted funds must remain consistent with the donor's charitable purposes, which is a standard you can only meet through the process, not around it. The villain is not flexibility. It is secrecy.
How to read it
The clarifying way to understand this story is to drop the frame of greedy colleges versus betrayed donors, true as it is in the worst cases, and see the structural trap underneath. Restricted endowment money looks like an available reserve and is designed to be the opposite; the protection that locks it away fails at the precise moment of maximum desperation, when boards are tempted and oversight is thin; and the soft language of borrowing lets institutions avoid naming what they are doing. The falling small donor, like the widow who lost her husband's scholarship, tends to bear the harm, while lacking the resources to enforce her rights that a large donor with lawyers would have, which is why several states have moved to make it easier for donors to sue.
The useful response is not the absolutist one of honoring every restriction to the death, which can kill an institution a donor loved and defeat the deeper purpose of the gift. It is to strengthen the legitimate path and close off the illegitimate one: make the proper modification process, donor consent, attorney-general review, cy-près petitions, faster and more accessible so desperate colleges have a real consent-based option, improve enforcement so that secret raids are caught before the money and the college are both gone, and insist on honest accounting that stops presenting restricted funds as reserves the institution can draw on. It is worth noting, too, that this crisis of poor schools misusing restricted money is nearly the mirror image of the separate political fight over wealthy universities declining to spend their large unrestricted endowments; the word endowment conceals that these are different kinds of money with opposite problems. This analysis takes no position on those political disputes, and is not legal advice; donors concerned about a gift should ask the institution directly about its restrictions and, if worried, consult their state attorney general or a lawyer. The core point is narrower and sturdier: the money looks available, its whole purpose is that it isn't, and the real breach is not using it in a crisis but using it without asking.
Primary sources
- The Wall Street Journal's reporting by Alexandra Citrin-Safadi and Douglas Belkin, as carried by RealClearPolitics, MSN, and other outlets, for the account of struggling private colleges tapping restricted donor endowments for operating expenses, the widow's $30,000 scholarship at Notre Dame College and its refusal after the school's 2024 closure, the Perspective Data Science estimate that nearly 200 colleges drew on restricted funds in 2025 versus 131 in 2021 with most going to everyday expenses, founder Matthew Hendricks's warning about small-college closures, Philanthropy Roundtable fellow Joanne Florino's concern that living donors are discovering their gifts are not being used as intended, the Ohio attorney general's complaint against fourteen Notre Dame College trustees and officers alleging improper use of more than $2 million in restricted funds, which the defendants deny, and the note that Kansas, Kentucky, Georgia, and Montana have passed laws making it easier for donors to sue over misused restricted gifts.
- Mondaq's legal analysis for the June 2026 Iowa Supreme Court decision in In re Ezra L. Totton Scholarship holding that modifications of donor-restricted funds must remain consistent with the donor's charitable purposes, and for the framework of UPMIFA, in effect in 49 states and D.C., and the cy-près and equitable-deviation doctrines.
- U.S. News & World Report opinion for context on the higher-education financial crisis, college closures, and the strategic and donor-reengagement dimensions of endowment use.
- General reporting on congressional proposals by Senator Josh Hawley and Representative Jim Jordan to condition federal aid on wealthy universities spending their endowments, cited only to contrast the separate problem of large unrestricted endowments.