Fitch Ratings predicts an even gloomier financial outlook for US colleges and universities, with smaller private schools being hit the hardest.
Slowing revenue growth and steeper costs from inflation are squeezing school budgets across the country. But institutions that are particularly vulnerable are those that are less selective, lack dynamic programming and are overdependent on student fees. Fitch has a deteriorating outlook on the sector; year to date, the firm has revised the outlook downward for seven schools and upward for four.
“We do, of course, recognize that some macroeconomic conditions have eased” said Emily Wadhwani, senior director and higher education sector lead at Fitch, speaking in a webinar Thursday. “But we do expect the sector to yield generally softer operating margins and continue to show some strain.”
Wadhwani said she expects more pressure on schools in the BBB category and below, which represents roughly a fifth of Fitch’s higher ed portfolio.
Public institutions benefited from federal and state stimulus, and many emerged from the pandemic with more budget flexibility than private schools. Ohio State University, for instance, has enjoyed “very good” adjusted cash flow margins thanks, in part, to one-time stimulus and strong revenue growth, according to a Fitch report in July.
Still, the economic forecast for higher education more broadly is complex. While cooling wages and employment growth could boost enrollment, the expiration of a student loan grace period is likely to drive up delinquencies.
Schools are increasingly discounting their incoming freshman tuition through institutional aid, and face an uphill battle selling the value proposition of a degree, Wadhwani said.
A recent survey conducted by the Bill & Melinda Gates Foundation, HCM Strategists, and Edge Research found 18- to 30-year-olds who never enrolled in a 2-year or 4-year college program are losing confidence in the importance of a degree.
To adapt, some colleges are diversifying their revenue streams by targeting adult learners, transfers and international students.
A bungled rollout of an overhauled Free Application for Federal Student Aid in December — saddled with delays and technical issues — also didn’t help. “We are seeing enrollment pressure for schools that had challenges with FAFSA rollout in a way that has impacted incoming classes,” Wadhwani said.
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