Dive Brief:
- S&P Global Ratings and Moody's Ratings last week issued their respective forecasts for higher education in 2025, both pointing to financial opportunities for some and continued challenges for others.
- S&P for the third year issued a split outlook for the nonprofit higher ed sector. The 2025 outlook is negative for what analysts called “highly regional, less-selective institutions that lack financial flexibility” but positive for larger colleges with broad reach, steady demand and ample resources.
- Meanwhile, Moody’s again gave the higher education sector a stable outlook as “revenue and expense paths converge.”
Dive Insight:
Analysts for both agencies presented a mixed bag of challenges and opportunities for higher ed writ large. Whether an institution faces more of one or the other depends largely on its profile.
S&P analysts called that state of affairs the “bifurcation” of the financial world of nonprofit colleges.
As they put it, “Strong institutions hold their market position, excel at fundraising, and have healthy balance sheets while working to improve operating margins; struggling schools face enrollment declines, leading to strained operations and, often, liquidity issues.”
Moody’s analysts said colleges generally stand to benefit in 2025 from increases in state funding, as well as other revenue sources, such as tuition, donations and income from university healthcare systems.
The agency also pointed to slowing inflation as a financial relief valve for the whole sector.
Despite the easing cost pressures, some colleges will continue to struggle to balance their budgets. Moody’s analysts noted that “approximately one-third of private universities and 20% of public universities will continue to have compressed margins and a limited ability to further reduce costs, resulting in operating deficits greater than 2%.”
While institutional operating expenses may be easing, the Moody’s team pointed to financial costs that “lurk” beyond normal operations. Among them are climate events, cyber risks, governance “turmoil,” legal issues and potential shifts in government policy.
Analysts pointed to a host of possible policy changes raised during the 2024 presidential campaign, including around endowment taxes, accreditation, immigration and continued existence of the U.S. Department of Education.
Although inflation for colleges might be easing, it hasn’t leveled entirely yet, and costs remain considerably higher than before the pandemic. That was one factor listed in S&P’s outlook, as well as that of Fitch Ratings, which recently issued a negative outlook for higher ed in 2025.
Enrollment is another key factor in the financial fate of colleges. As S&P analysts noted, “Many colleges and universities continue to report falling enrollment amid heightened competition for students and a greater focus on affordability.”
The much-discussed “demographic cliff” — a drop in the population of traditional college-aged students expected to begin around 2025 — could lead to a sharp increase in distress and closures among colleges according to recent modeling from the Federal Reserve Bank of Philadelphia.
