Moody’s Issues Negative Outlook for Higher Education

On the heels of a similarly downcast assessment by Standard & Poor’s, Moody’s Investors Service has issued a negative outlook for the higher-education sector in the United States. The credit-rating agency also issued individual reports on median benchmarks for the finances of public and nonprofit private colleges, noting significant tuition-revenue declines at both types of institutions.

While American higher education faces limited growth prospects over the next 12 to 18 months, Moody’s says, positive trends like strong long-term demand for higher education and reduced household debt could help create conditions for colleges to stabilize over the next year. But Moody’s cautions that the institutions will face continued financial pressures in the near term.

Among those pressures:

  • Growth in tuition revenue remains stifled by affordability concerns, legislative ceilings on tuition levels, and steep competition for students.
  • State financing of higher education will increase, on average, just 3 to 4 percent—not enough to meet the growth in expenses.
  • Already stiff competition for sponsored-research dollars is getting stiffer, with success rates for proposals dropping from 19 percent in 2008 to below 15 percent last year.
  • One in 10 public and private colleges is suffering “acute financial distress” because of falling revenues and weak operating performance.
  • Public colleges will begin to feel the impact of underfunded pensions and health benefits for retirees.
  • Most public colleges and many private ones will be unable to achieve a 3-percent annual growth rate in operating revenue, Moody’s benchmark for sustainable financing at a time of low inflation.

On the positive side, Moody’s notes that the U.S. Department of Education projects a 20-percent growth in master’s degrees and a 9-percent growth in associate degrees, opportunities in both online education and new certificate programs, and a rising earnings premium for those with college degrees. Citing data from the Pew Research Center, the report states that, among those age 25 to 32, the earnings premium in constant 2012 dollars was $17,500 in 2013 compared with $15,780 in 1995 and just $7,499 in 1965.

Further bolstering higher education’s bottom line are increases in giving fueled by positive stock-market returns and a growing demand for educated workers.

Public institutions face intensifying pressure on net tuition revenue, with tuition and auxiliary revenue accounting for nearly half of their operating dollars. A quarter of regional public institutions saw declines in net tuition revenue, compared with just 4 percent of flagships and state university systems, Moody’s said.

Among private institutions, Moody’s noted, “there is a growing disparity between tuition-dependent colleges and market-leading universities with diverse revenue sources.” The sector has remained strong over all by holding the line on costs, but one in five private colleges has a cash-flow margin below 10 percent. Nonetheless, solid endowment returns and increased giving have raised the wealth of private colleges past prerecession levels.

The three reports—on median benchmarks for public colleges and nonprofit private colleges, and on the overall financial health of the higher-education sector—are available for Moody’s subscribers or for purchase at its website.

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