Financial Outlook Is Grim for Colleges With High Debt, but Remains Stable for Many

Colleges with high debt and limited cash could face credit downgrades in 2011, while more financially secure institutions are likely to come through the economic downturn with less risk to their credit rating.

Those were among the findings from a report released on Monday by the credit-rating agency Standard & Poor’s, which predicted a mixed financial outlook for the nonprofit sector of higher education in the 2011 fiscal year.

Over all, the report foresees “small pockets of distress and larger pockets of strength” throughout higher education, noting that rising interest rates could pose a challenge for institutions with variable-rate debt. Faced with continued cuts in state support, some public colleges and universities could consider consolidating or merging with their peer institutions, the report says.

Many colleges did not raise faculty salaries in the 2010 or 2011 fiscal years, and many also deferred contributions to employee-retirement plans. Those trends could hurt the competitiveness of some institutions and create challenges in attracting a strong staff as well as research funds, the report says.

Enrollment demand at the institutions Standard & Poor’s rates should remain high in 2011, it said, as more students seek admission than many institutions can accommodate. Public universities still have a cost advantage over private institutions, the report says, and the agency expects an “equal number of upgrades and downgrades” in 2011.

Standard & Poor’s projections echo predictions from a recent report by Moody’s Investors Service, which anticipated a stable outlook for a small number of well-managed, diversified colleges, as smaller and midsize institutions remain more financially vulnerable. Another report, from Fitch Ratings, predicted a brighter fiscal year and stable credit ratings for public and private universities despite cuts in state funds.