This is part of 9fin’s special report looking at financial distress and M&A in American higher education. Read more here.
American colleges and universities collectively sit on more than $800bn of endowment assets — an unusually large pool of savings for a sector where a growing number of institutions are staring down enrollment cliffs, ratings downgrades, closures and mergers. Yet as the list of distressed schools grows longer, university boards and restructuring professionals have to ask not how much a school has in its endowment, but how much of it is actually reachable to service debt.
An endowment is, in the simplest terms, a pool of donated capital that a college invests in perpetuity, spending only a portion of the returns each year of typically 4-5% of the fund’s multi-year average market value. The principal, or “corpus,” is meant to be preserved forever so the fund can support the institution across generations. The annual draw pays for professor salaries, financial aid, buildings and research.
Crucially, an endowment is not one large bank account. It is almost always an aggregation of hundreds or thousands of individual donor-restricted funds — endowed chairs, named scholarships, specific research programs, athletic funds — each governed by its own rules dictating how that money can be spent. A smaller slice is “unrestricted” or “quasi-endowment” – funds the school’s board has designated as endowed, but retains the technical authority to unwind.
The sector is also unusually top-heavy. Per FY2025 figures, The University of Texas system (UTIMCO), Harvard, Yale, Stanford, Princeton and MIT hold roughly $273bn between them, an average of around $45bn each, accounting for close to a third of aggregate US endowment assets, while the median US college endowment holds around $250m. Investment allocations at the larger endowments are dominated by alternatives — private equity, venture capital, hedge funds and real assets, in the "Yale model" tradition — which leaves many funds meaningfully illiquid at exactly the moment distributions from PE portfolios have slowed to a crawl and larger pressures mount on school cash flows.
Why the money isn't just sitting there for the taking
Endowments live at the intersection of trust law and nonprofit corporate law. In almost every U.S. state, they are governed by the Uniform Prudent Management of Institutional Funds Act ("UPMIFA"), adopted in 2006 and now enacted in 49 jurisdictions with only marginal state-by-state variation.
UPMIFA does two things that matter to a distressed university board. First, it imposes a "prudent person" standard on the trustees who manage the fund. They must act in good faith, with the care an ordinarily prudent person would use, in the context of the portfolio as a whole rather than asset-by-asset. Trustees with special expertise are held to that higher standard, must diversify unless circumstances dictate otherwise, and may only incur costs that are reasonable in relation to the fund. In practice, the prudence standard is highly deferential — closer to Delaware's business judgment rule than to strict fiduciary scrutiny — and there is no record of state attorneys general initiating a lawsuit against a university over ordinary portfolio decisions.
Second, and more importantly, UPMIFA does not override the terms of the gift instrument. If a donor conditions a gift on a specific purpose — endowing a chair, funding a named scholarship, or building a facility — that purpose attaches to the money permanently. The school cannot unilaterally redirect it unless the restriction is formally lifted. Each year, UPMIFA lets a school draw what it prudently determines the fund can support — what the statute calls "appropriation for expenditure" — weighing the fund's duration and purpose, the school's other resources, economic conditions, inflation and expected returns. In practice that means the corpus stays invested and the school takes 4-5% of the fund's value each year to spend on the donor's restricted purpose: a $2m endowed chair produces roughly $80k-$100k for the professor this year, and the same in perpetuity. That is authority to spend within the donor's terms; it is not authority to change what the money is for.
When a school wants to do more than take a normal annual draw — sell restricted corpus, repurpose a fund, or wind it down — there are only three options. The most direct is donor consent, obtained in writing from the original donor. If the donor is dead or unreachable, the school can go to court under one of two doctrines. Equitable deviation allows a court to modify a management, investment or duration restriction that has become "impracticable or wasteful”, while ”cy pres” allows a court to modify a specific charitable purpose that has become "unlawful, impracticable, impossible to achieve or wasteful.” However, the court must do so in a way that hews as closely as possible to the donor's original intent.
The evidentiary bar is high. Courts have refused to modify restrictions where a congregation had shrunk and twenty-one years had passed (Central United Methodist Church v. Estes-Palmer Foundation, 207 Mich. App. 194 (1994)) and where compliance was merely inconvenient rather than impossible (In re Trust Created by Hill, 509 N.W.2d 168 (1993)). And in every case the state attorney general must be joined as a party. Under the classical charitable trust doctrine as codified in UPMIFA, the AG holds exclusive standing to enforce donor restrictions, meaning even the original donor generally has no standing to sue to enforce their own gift unless they specifically reserved that right (Carl J. Herzog Foundation v. University of Bridgeport, 243 Conn. 1 (1997)).
Routine investment management is an easier question. When a school's investment office rebalances the portfolio, sells public securities, or offloads private equity LP stakes on the secondary market, the corpus and donor restrictions remain intact — only the underlying investments change hands. Those decisions fall under the deferential UPMIFA prudence standard, and in the rare case where a donor tried to lock the fund into a specific holding ("hold these shares of family-company stock in perpetuity"), the school can typically modify the restriction under equitable deviation with minimal friction.
This is why the Yales and Harvards of the world are able to shed billions of dollars of private-market exposure on the secondary market without running afoul of the law.
What a struggling college can actually reach
The moment a distressed college's board contemplates Chapter 11, the restricted-endowment question becomes a creditor-recovery question. Nonprofits cannot be pushed into involuntary bankruptcy under 11 U.S.C. § 303(a), so every college case is a voluntary board decision, typically requiring notice to the state AG.
Once the case is filed, section 541 pulls the debtor's property interests into the estate. But under Butner v. United States, 440 U.S. 48 (1979), a landmark bankruptcy law decision, state law defines what those interests are. Because state charitable trust law treats donor-restricted funds as being held for a specific charitable purpose, the debtor school simply doesn't have the kind of property interest in the corpus that the estate can sweep up. Three Code provisions reinforce that result:
- Section 541(f) allows transfer of 501(c)(3) property to a non-501(c)(3) entity only in compliance with non-bankruptcy law
- Section 363(d) limits the trustee's ability to use, sell or lease estate property to what non-bankruptcy law allows
- Section 1129(a)(16) requires that any Chapter 11 plan transfer by a nonprofit comply with non-bankruptcy law governing such transfers
Together they mean that AG oversight and charitable trust restrictions flow through the bankruptcy code intact.
The leading modern authority is In re Parkview Hospital, 211 B.R. 619 (Bankr. N.D. Ohio 1997), which held that charitable funds contributed as "restricted" with only income available for use are not property of the estate. In Matter of Friends for Long Island's Heritage, 80 A.D.3d 223 (2010), a New York court held that donor-imposed limitations must be honored even during judicial dissolution — the state's policy of respecting donor restrictions carried greater weight than the claims of creditors.
Cy pres relief to redirect restricted funds toward creditor payment is theoretically available, but AGs and courts have consistently resisted using it to solve financial hardship as opposed to genuine impossibility. When a college winds down, the vast majority of donor-restricted endowment funds get moved to a substitute beneficiary: another educational institution with a similar mission, a community foundation granting scholarships, for example. This process is driven and enforced by the AG who holds authority to transfer these assets. For example, when Marlboro College closed in 2020, its endowment and a portion of its campus assets were transferred to Emerson College under an AG-blessed agreement, with restricted funds continuing to support transfer students and specific academic programs. When Wheelock College merged into Boston University (BU) in 2018, restricted endowment funds passed to BU with donor restrictions running through them, and BU committed to continue funding scholarships and programs consistent with donor intent.
So what can a distressed college put on the table for creditors? In general: its real estate, its unrestricted operating assets and its board-designated "quasi" endowment. The rest of its endowment — often the biggest single line on the balance sheet — is largely off-limits.
When a college hits the wall, the size of the endowment is almost never the number that matters. The number that matters is how much of it the board can legally reach to cover its bills.
