Dive Brief:
- Pressure on college finances is intensifying despite modest enrollment growth this fall, slowing inflation and other tailwinds for the sector, according to a recent analysis by Fitch Ratings.
- In a Friday release, Fitch noted that while most of the colleges it rates have stable financial outlooks, it has increasingly lowered outlooks for colleges in recent quarters — which could portend more credit downgrades ahead.
- Sectorwide, the ratings agency has a negative outlook for higher education, a now multiyear trend, Fitch senior director Emily Wadhwani noted in a Thursday webinar. “We do expect the sector to yield generally softer operating margins and continue to show some strains on financial flexibility as we head into 2025,” she said.
Dive Insight:
Fitch pointed to some of the key challenges for colleges at the moment, among them “highly variable” demand for higher education and institutional costs that remain elevated and growing despite easing inflation.
Looking at broader economic trends affecting the sector, Wadhwani noted in a presentation that cooling wage and employment growth could be a double-edged sword for higher ed.
On the one hand, it could stimulate demand for education and pad operating margins for institutions by slowing employee salary growth. At the same time, slowing consumer spending and rising household debt-to-income ratios could “squeeze household tolerance and capacity for additional student loans,” she noted.
Also weighing on demand are increasing questions about the value of a college degree. Fitch pointed to recent Pew Research Center polling that found 29% of surveyed U.S. adults said a college degree wasn’t worth the cost. Moreover, Fitch cited a decreasing share of recent high school graduates currently enrolled in college since 2019.
Wavering demand for college has kept net tuition prices in check. “Discounting is at its steepest for every incoming freshman class, which then becomes a trailing reference point as those students head towards graduation,” Wadhwani said in a statement.
Net tuition revenue is expected to see a median increase of over 2% in 2024 for both public and private institutions. However, net tuition growth has been slowing and is well below the roughly 8% median increase for the public sector and 4% median uptick for the private sector seen in 2012, according to Fitch.
All of those challenges factor into Fitch’s negative view of the sector overall. Moreover, the agency’s changes to outlooks for individual institutions this year — which can foreshadow possible ratings downgrades and upgrades — have been “decidedly negative,” Wadhwani said in the webinar.
Specifically, Fitch has negatively revised outlooks for seven institutions while revising them upward for just four.
However, institutions aren’t feeling the pressures equally.
“Some flagship public institutions, selective private institutions, and HBCUs are achieving record enrollment numbers,” Wadhwani said in a statement. “Conversely, many smaller, less selective colleges continue to see their enrollment decline.
