People looking for clues about higher education’s future fiscal health saw reasons for worry in a new report by Moody’s Investors Service. The bond-rating agency announced on Wednesday that, for the first time in the 12-year history of its annual tuition survey, both private and public colleges are likely to lose net tuition revenue in the 2021 fiscal year.
Private institutions are expected to experience a median 3-percent decrease in net tuition revenue, while public institutions are expected to see a median 1-percent decrease. Last year’s report projected slight, softening growth for both sectors, due to tough competition for students in an increasingly challenging environment. This year’s report is comparatively bearish.
So what does this mean? Why do such small changes in this nerdy-sounding number make a critical difference for colleges, and bode ill for higher-ed finances for years to come?
Net tuition revenue matters more than enrollment. Much attention has focused in recent weeks on whether enrollment is up or down, as if the number of students sitting in class is the key indicator of a college’s financial health. That matters, but the more granular — and more important — indicator is net tuition revenue: how many tuition dollars actually come in, minus how much financial aid goes out. Net tuition revenue is, essentially, the bulk of the operating margin at private colleges and many public colleges; it’s the money they use to operate.
On the surface, it would seem that a college could increase its revenue by raising what it charges for tuition. But it’s not so simple. In reality, that often means that more students will find the institution difficult to afford (even with grants, loans, etc.), which may lead it to hand out more financial aid, which cuts into the money it gained by charging more tuition — a zero-sum game for net tuition revenue.
Of course, neither enrollment, nor net tuition revenue, is likely to go up during a global pandemic, when enrollment is down, family finances have suffered, and institutions may need to expend more financial aid. Another worrying sign for colleges: International students, long seen as cash cows because they often pay full tuition, have been trending down. (If a college’s revenue can’t be increased, then expenses must be cut, but that’s another story.)
Private colleges face a big problem. Generating net tuition revenue has become more and more fraught for many private colleges. Their tuition prices have been creeping up for years, but, as described above, so have the amounts they hand out in financial aid, also known as tuition discounts, even as the number of college-bound high-school graduates declines in many parts of the country. Many observers were calling this model unsustainable long before Covid-19.
Many admissions offers for the fall of 2020, and their accompanying financial-aid packets, went out before the pandemic started rewriting all the rules. But some colleges nonetheless offered additional aid, tuition-payment deferrals, discounts, and other deals designed to appeal to students who might not otherwise attend, and also to secure paying customers for years to come (more on that in a minute). Fewer students means less net tuition revenue. Fewer students — and more aid — means even less. Seventy-five percent of the private institutions surveyed projected a net-tuition-revenue decline for the 2021 fiscal year.
About 60 percent of private colleges reported discount rates higher than 50 percent for incoming students this fall, according to Moody’s. Nearly 30 percent had discount rates higher than 60 percent. Considering that Covid-19 and the social and economic recovery from it could extend for years, it’s difficult to imagine that colleges will be able to significantly increase their tuition, or reduce their level of aid, anytime soon.
Public colleges face problems of their own. Public institutions tend to operate in a different ecosystem than private colleges. Their obligations, to the state and its residents, can be complicated. They are also competing for a limited number of students in a challenging environment, with private colleges and sometimes with peer institutions in the same system.
Again, it’s all about net tuition revenue. If, say, a flagship is short of its enrollment target next summer, it could go deeper into its wait list — which might take students away from one of its four-year-public peers. A consultant recently relayed a story about a public flagship university that went deeper into its wait list for this fall and met its enrollment goal — but mostly with in-state students, who pay in-state tuition, instead of the always-desirable out-of-state students who pay more. The enrollment was right on target. The net tuition revenue was not.
Since public colleges are public, they get part of their financial support from their states, and while it may be a much smaller percentage of their operating budgets than it was before the 2008-9 recession, every dollar counts these days. The pandemic is expected to ravage state tax revenues. Education is typically one of the largest pieces of a state’s discretionary budget, so public colleges can count on some of the pain being passed on to them in the form of cuts in support. That’s not in the Moody’s tuition report, but it hangs over public higher education like a storm cloud.
Bad news now could mean trouble down the line. Incoming first-year students were down a median of about 6 percent at both private and public colleges surveyed for the report. The effect is likely to linger: The number of first-year students more or less establishes a rough size for that class as it moves through the institution. So a smaller class this year could help depress net tuition revenue for the next four years or so, unless the college can make up the ground in the years to come — a daunting proposition at best.
