Dive Brief:
- Fitch Ratings on Thursday issued a negative outlook for the higher education sector for the coming year as colleges grapple with numerous operational issues including increased competition for students, according to a client note emailed to Education Dive.
- In lowering the outlook from "stable" to "negative," analysts with the ratings agency said lower-tier institutions could suffer disproportionately from "[n]ear-term constraints on tuition growth, price sensitivity, longer term demographic shifts, and increasing uncertainty on federal and state regulatory and funding support." The analysts, led by Fitch director Emily Wadhwani, also noted college consolidation "may accelerate," including through mergers, acquisitions, affiliations and, in the most dire cases, closures. The overall closure rate remains below 1%, however.
- Fitch follows Moody's in issuing a negative outlook for higher ed. On Tuesday, Moody's maintained its negative outlook for the second consecutive year, citing many of the same conditions, according to a report emailed to Education Dive. Chief among them is low tuition revenue growth — which Moody's estimates will be between 1% and 3.5% sectorwide — due to a focus on affordability and competition over students.
Dive Insight:
Tuition being the primary source of revenue for many colleges, credit analysts are homing in on the limits of its growth after years of tuition hikes that outpaced consumer price increases in much of the rest of the economy.
Fitch analysts noted that since 2000, average annual tuition increases have been between less than 1% and 5.9% for private institutions and up to 11% for public colleges. Those increases have fallen since 2014, Fitch notes. And they could be further constrained by competition for students, scrutiny on the costs of college, and a strong job market that can raise the opportunity cost for attending college and decrease demand.
Fitch notes high school graduation rates are slowing, meaning more colleges are trying to recruit from a smaller pool of qualified students. Demographic shifts are also altering demand, and unevenly, with smaller private and regional colleges under the most pressure and more competitive institutions with wider geographic draws "more likely to withstand these changes," the report states. (Declines in international student enrollment amid Trump administration crackdowns on visas are not helping demand either, analysts with both Fitch and Moody's noted.)
Moody's analysts, led by vice president and senior credit officer Susan Shaffer, expect about half of universities to grow revenue at least 3%, while private colleges are freer to ramp up tuition. The latter group is also more dependent on tuition and other student-based revenue, which account for a median 74% of private university operating revenue, according to Moody's. Across the sector, tuition makes up 25% of all revenue.
While tuition and state funding might lag, colleges have been looking to raise funds elsewhere, including through philanthropy and investments in a strong market, according to Moody's. Fitch also noted that institutions have been able raise targeted revenue, manage expenses and chase partnerships, while higher ed's fundamental financial drivers remain in place.
"The need for an educated workforce remains a key tenet, recognized at both state and federal levels as integral to economic growth and stability," the Fitch report states.
