Dive Brief:
- Fiscal 2023 was a “tough year” for private nonprofit colleges amid a “long trend of weakening demand,” S&P Global Ratings said in a Tuesday report.
- Median full-time equivalent enrollment at private nonprofits fell 0.8% year over year in fiscal 2023, while retention rates hit a five-year low of 82.4%, according to S&P’s analysis. Given demand pressures and rising costs, institutions in the private nonprofit sector saw five times more credit downgrades than upgrades during the fiscal year.
- In a separate report on public colleges, S&P analysts said the recently ended fiscal year also tested the financial resilience of those institutions, with median full-time equivalent enrollment falling 0.7% for the sector.
Dive Insight:
The combination of declining enrollment and rising expenses is eating away at the margins of many higher ed institutions across the U.S.
Flagging demand has taken a toll on college operations and finances. “Deeper tuition discounting further strained net revenue growth as institutions competed for students,” Megan Kearns, a credit analyst with S&P, said in a statement.
S&P found the average tuition discount rate at private colleges — which accounts for institutional aid provided to students that decreases the tuition paid by students — rose by 0.7 percentage points to 44.8% in 2023.
That is the highest rate in five years and 4.7 percentage points above 2019’s average discount rate, per S&P’s analysis.
A study earlier this year from the National Association of College and University Business Officers also found that discount rates at private colleges reached new highs in 2023 while net tuition revenue declined after adjusting for inflation.
With rising costs and flagging revenue, median operating margins at private nonprofits turned negative for the first time in at least 10 years, according to S&P. Operating income fell to negative 0.1% for the sector, compared to positive growth of 1.1% in 2022.
“Once pandemic-related federal relief funds were depleted, many private colleges and universities lacked a financial cushion to overcome enrollment declines, increased discounting, and inflation,” S&P analysts said in their private college report.
For public institutions — which face many of the same financial pressures — median operating margins fell from 2.9% in 2022 to 0.3% in 2023, S&P said.
State funding served as a bright spot and “big differentiator” for these colleges, said Ruchika Radhakrishnan, an S&P credit analyst, in a statement. The ratings agency found that state appropriations per full-time equivalent enrollment rose 11.6% year over year in 2023.
A spring report from the State Higher Education Executive Officers Association similarly found increases in state funding overall.
But, S&P noted, increases in state appropriations weren’t enough to “quell the operating pressures at smaller regional public universities with weaker credit quality.”
