Cash-strapped colleges are draining their endowments to survive

Hiram College in Ohio borrowed from its $56M endowment and ultimately pulled over $47M—including money from restricted donor funds—to cover multi-million-dollar deficits, prompting work with the state attorney general on a repayment plan. The article highlights a broader uptick in 2025: nearly 200 private colleges borrowed from restricted endowments (up from ~130 in 2021), with analysts warning of long-term credit-rating risk (e.g., Manhattan University downgraded to BBB- after drawing ~7%+ annually). Standard endowment spending norms (budgeting ~5% vs assumed 7–8% growth) appear to be breaking down as declining enrollment and financial pressure force higher endowment draw rates, potentially damaging donor trust and credit quality.

Analysis

This is less a one-off liquidity story than an early-warning signal for the lower end of nonprofit credit. Once a school starts monetizing restricted capital, the market mechanism is usually a negative feedback loop: donor confidence weakens, refinancing terms tighten, and admissions teams lose credibility just as they need it most. That pressure should show up first in bond spreads and covenant language, not in broad equity multiples.

The second-order effect is that stress is concentrating in small, local institutions rather than the elite endowment complex, so the opportunity set is selectivity, not beta. Ratings surveillance and restructuring work should rise over the next 1-3 quarters, but any benefit to SPGI is incremental; the bigger read-through is that underwritten liquidity assumptions at weaker nonprofits may be stale. If closures or attorney-general actions accelerate into the next enrollment cycle, lenders and bondholders will likely reprice before public equity investors do.

Contrarianly, not every endowment draw is terminal; some schools are using it as bridge financing while they cut costs and reset enrollment. The key falsifier is whether spending rates revert toward sustainable levels and whether ratings agencies stop flagging going-concern risk. If the draw rate stays elevated into fiscal 2026, this stops being a temporary fix and becomes evidence of structural value leakage.

Key Decisions for Investors

• Short HYG / long LQD for 1-3 months as a liquid proxy for nonprofit and lower-quality credit stress; target a modest spread-widening move, and cover if HY spreads fail to widen after the next round of downgrade actions.
• Do not chase JPM as a beneficiary here; higher-ed distress is not enough to move a diversified bank’s earnings unless filings show a concentrated nonprofit lending book. Treat JPM as a watch item, not a trade.
• Small tactical long SPGI only on weakness, as a hedged way to express more rating-surveillance activity; keep size small because the revenue lift from this theme is likely limited.
• Add an alert for any additional going-concern notices or state AG interventions over the next 30-90 days; if the pace of distressed-college headlines accelerates, increase the short in lower-quality credit.
• If you have access to muni/education credit desks, prefer shorting the weakest private-college obligors or their bonds over broad bank exposure; the fastest repricing should occur in the actual credits, not the lenders.