Near-Term Outlook Is Bleak for All of Higher Education, Moody’s Says

Across-the-board pressure on all of the revenue sources that support higher education has prompted Moody’s Investors Service to issue a negative short-term outlook for the entire sector in a report issued on Wednesday.

“It basically means that there’s nowhere to hide, even for diversified market leaders, the top-tier universities,” said Eva Bogaty, the credit-rating agency’s assistant vice president and analyst who wrote the report. For the past two years, research universities have escaped criticism from Moody’s because of their diverse sources of revenue. However, state-government appropriations, investment earnings, gifts, research grants, and patient-care reimbursements are all facing economic pressure, the report says.

The outlook report, which is released annually at the beginning of the calendar year, expresses the agency’s expectations for the fundamental credit conditions of the industry over the next 12 to 18 months. Moody’s attributed its negative outlook to five key factors:

  • Depressed family incomes and household net worth have suppressed net tuition growth.
  • All revenue sources are strained; financial diversity no longer helps colleges.
  • Rising student debt and default rates have hurt perceptions of the value of a diploma.
  • Public and political scrutiny has increased the risk of more regulation.
  • Colleges face a challenging future without strong leadership and better governance.

“It’s easy to lead a university when you’re in an environment of double-digit investment returns and all your revenue sources are pointing in the right direction,” said Karen Kedem, co-manager of the Moody’s U.S. higher-education team and an editor of the report. “It’s much more challenging when you have to start making programmatic and resource decisions because you’re not able to grow your revenue.”

Despite the gloomy tone of the report, the analysts emphasized that the fundamental demand for and value of higher education remained solid.

“We’re not believers that higher ed is in a bubble,” Ms. Bogaty said. The outlook for the industry, she said, “is bleaker for the next 12 to 18 months. That’s not to say we think it’s doomsville.”

The report says that the outlook could be changed to stable if the nation’s economic growth and housing market improve, the unemployment rate drops below 6.5 percent, and stock-market returns are strongly positive in consecutive years.

But, Ms. Kedem added, “we don’t expect these pressures to go away quickly.”

The report also casts an eye on emerging and potentially destabilizing trends like the rise of massive open online courses, or MOOCs, and offers forecasts on sectors related to traditional four-year higher education.

Community colleges, it says, are being challenged by enrollment declines and potential cuts in Pell Grants. Nonprofit institutions, including public universities’ foundations, will face pressure as Congress scrutinizes tax deductions for charitable contributions. Revenue and enrollment declines continue to hurt for-profit higher-education companies, the report asserts. Global higher education is still nagged by some uncertainties, but the long-term prospects for that sector remain strong, Moody’s says.

The entire report is available online to Moody’s subscribers.

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