A “significant minority” of private colleges and universities are projecting a decline in net tuition revenue this year, which could hurt their future financial strength, according to a report from Moody’s Investors Service scheduled to be released on Tuesday.
The report, “New Tuition Challenges at Many U.S. Private Universities,” is based on a survey taken by 100 of the 286 private colleges and universities Moody’s rates. Twenty-nine percent of respondents project a decline in net tuition and fee revenue for the 2010 fiscal year. In contrast, only 9 percent saw a drop in net tuition and fee revenue in fiscal year 2009.
Those projections are probably the result of colleges keeping tuition increases small while increasing institutional aid, the report says.
“Our big-picture conclusion is that it’s the first concrete data we’re really seeing that shows the impact of the recession on tuition pricing,” said Roger Goodman, a vice president and team leader at Moody’s. What’s unclear is whether this represents a one-year change or a trend.
A drop in net tuition revenue can have enormous financial implications for colleges, which build their budgets around that expected income, said Robert A. Sevier, senior vice president for strategy at the higher-education-marketing company Stamats Inc. That made it a good year to budget conservatively.
Fairfield University did just that. The university, a private, Catholic institution in Connecticut, projects a $2-million to $3-million decline in net tuition revenue this year compared with last year, said William J. Lucas, vice president for finance. Fairfield was short about 25 students in its freshman class, though an increase in graduate-student enrollment helped to make up for that. The university also increased its financial aid by 11 percent while raising tuition by about 4 percent.
The likely drop in tuition revenue was not a surprise. “We expected it to be lower—we knew we were giving more financial aid,” Mr. Lucas said. In preparation, the university made $5-million worth of permanent budget cuts, which included layoffs. “If we had not cut this money, we would obviously be in a world of hurt.”
The drop in tuition revenue has put pressure on the admissions staff as it plans next year’s class. “There’s no margin for error,” said Karen A. Pellegrino, director of undergraduate admission. In addition to keeping a close eye on its applicant pool, Fairfield is considering changing its use of financial aid. The university now awards 10 percent of its institutional aid on merit, but might increase that percentage to allow for more strategic recruiting, Ms. Pellegrino said.
Moody’s is concerned that some colleges that expect a drop in tuition revenue are not in a good position to absorb it. Only 25 percent of colleges expecting a decline in net tuition revenue this year are rated Aa3 or higher, meaning they are financially strong and able to withstand market changes. Many of the lower-rated colleges could be discounting tuition simply to fill their classes.
In fiscal year 2009, 56 percent of colleges that saw a drop in tuition revenue were rated Aa3 or higher. Colleges with that high rating may have had other reasons, including scrutiny from the U.S. Congress, for increasing their aid last year, Mr. Goodman said.
One thing the data does not show is whether colleges that increased their discount rate did so to remain competitive or whether they were overcompensating, Mr. Goodman said. If the latter, he would expect to see the discount rates bounce back next year.
Moody’s found that colleges in the Mid-Atlantic and Midwest regions face the greatest net tuition pressure, while those in the New York and New England regions have varied projections, and those in the South and West are facing less pressure. The report found that colleges in the South and West are at an advantage because demographic shifts are in their favor, while the New York and New England region includes colleges with a strong market position and national draw that can overcome the demographics of their region.
More than two-thirds of respondents reported they had accepted a larger share of applicants for this fall compared with last year. The median selectivity was 60.8 percent, compared with 57.1 percent for the fall of 2008. Eighty-two percent of respondents saw a decline in their yield, the percentage of accepted students who enroll.
The picture is quite different among public institutions, where tuition revenue provides a smaller share of the operating budget. Moody’s also surveyed the 212 public colleges and universities it rates, and received responses from 61 of them. Ninety-two percent of respondents project an increase in net tuition and fee revenue for this fiscal year. That percentage is similar to the percentage that reported an increase last year but colleges expect the increase in tuition revenue for this year will be smaller.
Copies of the report are available upon request at higher.education@moodys.com.
