Endowment depletions rarely start with a formal decision. More often, one gift posted to the operating account doesn’t make it to the investment pool—and then another. Then the financial team decides to hold off on the transfer until the budget situation stabilizes. Then they make a formal resolution to spend at a slightly higher rate “just for this year.”
By the time the pattern shows up in the financial statements, it‘s often been building for several years. Every dollar that does not reach the investment pool is a dollar that does not earn, does not grow, and is not there when the institution needs it most.
For presidents, CFOs, and board members navigating one of the most financially complex periods in higher education’s history, understanding how this happens, and what UPMIFA (the Uniform Prudent Management of Institutional Funds Act) actually requires, is a survival skill.
| Key Indicator | Figure |
| Avg. tuition discount rate, FTFT undergrads — AY 2025-26 (preliminary) | 57.1% (NACUBO TDS) |
| Net tuition revenue per FTFT undergrad — AY 2024-25 (finalized) | −2.2% year-over-year |
| Share of NCSE institutions increasing operating budget reliance on endowment — FY25 | 42.8% |
| Effective endowment spend rate, FY25 | 4.9% (up from 4.8% in FY24) |
| Total endowment distributions, FY25 | $33.4 billion (+10.9% YoY) |
| Projected decline in high school graduates by 2041 | ~13% (WICHE) |
The Gift Transfer Gap
Many assume that “borrowing from the endowment” results from a formal resolution, a legal review, and a board vote. In reality, the most common form requires none of those things—which is exactly why it’s so easy to miss.
When a donor makes a gift intended for the endowment, there’s typically a lag between receipt and investment. In a well-functioning institution, that transfer happens promptly. But when operating budgets are under pressure, leaders delay the transfer. The gift sits in an operating or short-term account, providing liquidity to the institution. The endowment investment balance never reflects the gift. The investment earnings are never realized.
This is not embezzlement, and it’s usually not intentional. It’s a cash management decision made under pressure. At tuition-dependent institutions, it happens more often than most finance teams would like to admit.
Spending Rate Drift
Spending rate drift hides in plain sight in the financials.Most institutions target a spend rate of around 4-5 percent of a rolling average of endowment market value. The FY25 NACUBO-Commonfund Study of Endowments reported that the average effective spending rate rose to 4.9 percent in FY25 from 4.8 percent in FY24, and that 42.8 percent of participating institutions increased the share of their operating budget funded by the endowment. Total distributions reached $33.4 billion, a 10.9 percent increase over the prior year.
The endowment spend can climb several ways: the board formally raises the rate, the trailing-average formula produces a higher result in high-value years, or administrators make informal distributions outside the policy. Each has different governance implications, but all of them reduce the long-run purchasing power of the endowment if the rate outpaces investment returns net of inflation.
The Internal Loan That Never Gets Repaid
Sometimes the draw is more structured. The institution sets up an internal loan from the endowment or reserves to cover an operating shortfall, with a repayment plan tied to enrollment recovery or a new revenue initiative. When those initiatives underperform—which, in a period of structural enrollment decline, they often do—the “loan” becomes a permanent reduction in reserves.
None of this is prohibited. But these decisions rarely get the scrutiny they warrant, especially when they happen one at a time.
Why Endowment Depletion is Getting Worse
The Enrollment Cliff Is Here
The demographic shift higher education has anticipated for years is now hitting enrollment. The children not born during the Great Recession of 2007-2009 would have reached traditional college age around 2025. WICHE projects that the national population of high school graduates peaked that year and will decline by approximately 13 percent by 2041. For small- and mid-sized institutions in the Midwest and Northeast, the decline is already showing up in fall enrollment numbers.
This is a decade-long structural contraction in the available student market. Institutions once comfortably differentiated from competitors are now fighting for a shrinking pool of students.
The Discount Rate Problem
According to NACUBO’s most recent Tuition Discounting Study, the preliminary average tuition discount rate for first-time, full-time undergraduates at private nonprofit institutions reached 57.1 percent in AY 2025-26, up from 54.5 percent just one year earlier. For context, that rate was 48 percent a decade ago. The rate for all undergraduates (finalized at 50 percent for AY 2024-25) means that institutions are collecting roughly 50 cents of net revenue for every dollar of published tuition.
More troubling than the rate itself is the revenue consequence: finalized data for AY 2024-25 shows that net tuition and fee revenue per first-time undergraduate declined 2.2 percent year-over-year. Institutions are spending more institutional grant aid (funded largely from reserves, endowment earnings, and undedicated operating funds) to enroll a student body that generates less net revenue per head. This is not a sustainable tuition strategy.
Add Federal Uncertainty to the Mix
The FY25 NACUBO-Commonfund Study also noted that many large institutions turned to credit markets in FY25 to bolster liquidity amid policy and market uncertainty. Smaller institutions with fewer alternative revenue streams face disproportionate exposure to any drop in philanthropic support.
UPMIFA: The Framework, and Why It Matters Right Now
UPMIFA is the model state law governing how colleges and universities invest and spend donor-restricted endowment funds. Adopted in 49 states and the District of Columbia (Pennsylvania remains the exception), it replaced the older UMIFA framework, which had set an absolute floor: institutions could not spend below the historic dollar value (HDV) of the original donation.
UPMIFA eliminated the HDV floor and replaced it with a prudence standard. Under UPMIFA, boards must consider seven factors when deciding how much to appropriate from an endowment fund:
- The duration and preservation of the endowment fund
- The purposes of the institution and the endowment fund
- General economic conditions
- The effect of inflation or deflation
- The expected total return from income and the appreciation of investments
- Other resources of the institution
- The investment policy of the institution
UPMIFA does permit spending from underwater endowment funds (those whose current market value has fallen below the original gift value) when the board determines it is prudent to do so based on those seven factors. That expands institutional flexibility, but with a corresponding obligation: the board must make and document that determination.
The 7 Percent Threshold, and Why Your State May Differ
An optional provision in the model act (Section 4(d)), adopted by a number of states, sets a soft ceiling. Spending more than 7 percent of an endowment fund’s fair market value in a year (calculated on a rolling average of at least three years) creates a rebuttable presumption of imprudence. Boards can exceed it, but they bear the burden of documenting why.
Every institution should know which version of UPMIFA its state has enacted and whether the 7 percent presumption applies. That’s a question for the board, too, not just the finance office.
UPMIFA Does Not Govern Quasi-Endowments
UPMIFA applies only to donor-restricted endowment funds. It does not apply to quasi-endowments, which are funds that the board designated as endowment-like using unrestricted institutional dollars. Because boards created them, boards can redirect them; no UPMIFA analysis required.
This matters when an institution is considering using endowment assets to cover operating needs. Drawing on quasi-endowment requires a board resolution and clear accounting, but it’s a much simpler transaction legally than drawing on donor-restricted funds. Unfortunately, institutions under pressure often blur the line between quasi-endowment and donor-restricted funds, or treat their entire endowment pool as a single available resource, ignoring fund-level restrictions.
| The Governance Questions That Need Answers Before Any Borrowing on Endowment |
| Is this borrowing from donor-restricted or on quasi-endowment funds? Has counsel reviewed the structure? |
| What is our effective spending rate today, and what does this change do to it? Does it approach or exceed the threshold in our state’s version of UPMIFA? |
| Have we documented the seven-factor UPMIFA prudence analysis in board minutes for any draw or borrowing from donor-restricted funds? |
| Have we confirmed that all gifts intended for the endowment have been transferred to the investment pool and that no pending transfers are being used as informal operating liquidity? |
| If this is an internal loan, what is the specific repayment source and timeline? What enrollment or revenue assumptions underlie it, and how do those assumptions compare to current trend lines? |
| What does our endowment look like in 10 years at our current spend rate under a range of return scenarios, including one year like FY22 (−8.0% average return)? |
| Are we addressing the structural issue, or deferring it? |
When Using Endowment Resources Can Be the Right Call
None of this is an argument against ever spending more from the endowment, or against internal loans as a financial management tool. There are circumstances where increased endowment spending is correct: when it funds a strategic investment with a credible return, when it bridges a short-term revenue gap with a realistic recovery path, or when the mission genuinely requires it and the institution has the financial runway to sustain it.
UPMIFA’s intergenerational equity principle is a mandate for balance, not a prohibition on spending. Boards and presidents who are too conservative with endowment spending in a crisis may preserve the principal while losing the institution.
The key question is not whether to use endowment resources, but whether the decision is intentional, documented, structurally grounded, and honest about the trade-offs. A well-structured draw with a documented rationale, a specific strategic purpose, and a credible repayment or restoration plan is a legitimate tool. Drift is the real problem: informal decisions accumulate and erode institutional reserves without anyone making a clear-eyed choice.
Your Spend Rate Policy Should Be Doing More Work
Most institutions have a written endowment spending policy. Far fewer review it annually, apply it consistently fund-by-fund, or use it as an active governance document rather than a boilerplate disclosure in the financial statement footnotes.
A few specific questions worth working through:
- Is there a documented procedure for depositing new gifts into the endowment pool?
- Is the policy’s spend rate still calibrated to your institution’s actual financial condition, including your current enrollment trajectory, your discount rate, your operating cost structure, and your other available reserves?
- Does the policy distinguish between donor-restricted and quasi-endowment spending?
- Does the policy define how the trailing average is calculated, including the number of quarters, the valuation methodology, and what happens when funds have been in existence for less than three years?
- Does the policy address underwater funds explicitly and require documented board review before any spending from a fund below its historic dollar value?
- Is the spend rate approved each year, or just the spend dollars based on the budget?
- Does the policy include a ceiling that triggers a required board review when the effective rate approaches a threshold of concern?
- When was the policy last formally reviewed and updated by the board?
The effective spending rate across NACUBO participants rose from 4.8 percent to 4.9 percent in FY25. That’s a narrow move in isolation. Combined with the enrollment and discount rate trends described above, it suggests institutions are increasingly turning to endowment distributions to compensate for structural revenue compression—and that the trend will continue unless operating models change.
What Presidents and CFOs Should Do Now
- Audit your gift transfer process. Confirm that all gifts designated for the endowment have been transferred to the investment pool. If any are pending, identify the timeline and the governance decision needed to resolve them.
- Know your state’s UPMIFA. Pull the actual statute, confirm whether your state adopted the optional 7 percent presumption provision, and make sure your spending policy reflects the applicable legal standard.
- Separate your endowment fund accounting. Every CFO should be able to produce, on demand, a fund-by-fund report showing which funds are donor-restricted, which are quasi-endowment, which are underwater, and what the effective spending rate is for each category.
- Run the scenario analysis. Model your endowment value at the current spend rate over 10 years under at least three return scenarios: strong (10%+), moderate (6-7%), and stress (negative, like FY22’s −8.0% average). Share those projections with the board, not just the CFO.
- Document every draw. Any spending from donor-restricted funds above the policy rate, or any informal use of gift proceeds as operating liquidity, should be the subject of an explicit board discussion, a documented UPMIFA seven-factor analysis, and a minute entry. If you don’t document the draw, you can’t govern it.
- Bring the conversation to the president’s cabinet, not just the finance committee. The decisions that drive endowment erosion are often made during the budgeting process in enrollment management, development, and the president’s office, not in finance. The CFO’s job is to make sure those leaders understand the financial consequences before the decisions are made.
The Bottom Line
The endowment is one of the most important long-term assets an institution holds. It is also one of the most misunderstood, not because leaders are inattentive, but because the mechanisms of erosion are often gradual, informal, and appear reasonable in the short term.
Today’s mix of enrollment decline, record discount rates, compressed net tuition revenue, and rising reliance on endowment distributions is exactly where these incremental decisions compound fastest. A dollar not transferred to the investment pool today, a spend rate that drifts up by 10 basis points this year, an internal loan that never gets repaid: none of these is a crisis in isolation. Together, over time, they can fundamentally alter an institution’s financial trajectory.
UPMIFA gives institutions flexibility. It does not provide cover for decisions that were never clearly made. The prudence standard exists precisely because the most dangerous spending decisions are often the ones that feel reasonable at the time.
If your institution has not had an explicit, data-driven conversation about endowment spending policy in the last year, including a review of gift transfer practices, fund-level accounting, and a scenario-based projection of endowment value, this is the year to have it.
Data in this article drawn from: 2025 NACUBO-Commonfund Study of Endowments (FY2025); 2025 NACUBO Tuition Discounting Study (preliminary FY25-26 data and finalized FY24-25 data); WICHE Knocking at the College Door projections; NACUBO UPMIFA resources; state-level UPMIFA statutes (CA, NY, OH, TX, RI, ME, MD, MT, NV, NH, OR, TN, UT, WY, ND, VA, IL, IN, CO, CT, GA, and others reviewed).