Universities and colleges that struggled before the pandemic face a rougher path to fiscal recovery than those that were in good shape before it struck, rating analysts said.
S&P Global Ratings has assigned negative outlooks to fewer universities and colleges since the beginning of the year, according to a report published last week.
S&P began 2021 with 40% of the 439 four-year colleges and universities it rates on negative outlook. That number was 31% negative, 68% stable and 1% positive as of May 26, according to the report.
“While many schools were having difficulty meeting enrollment and revenue targets pre-COVID, the pandemic exacerbated those pressures by forcing a fundamental shift in business models for all,” analyst Jessica Wood said during an online event S&P held in conjunction with the report's release. “Higher-rated institutions, including flagships, fared better, on average, than their lower rated counterparts from an enrollment standpoint.”
The pandemic caused unprecedented drops in college and university enrollment numbers, but the effect on the schools differed, in part, based on their financial condition coming into the pandemic, Wood said.
“The enrollment impacts varied widely across the sector, with differences by type of school, geographic location, and overall credit quality,” Wood said.
Though more than two-thirds of the colleges and universities S&P rates saw enrollment declines, Wood said only 32 schools had a decline of 10% or more and 111 institutions actually experienced enrollment increases.
“The higher- rated public schools including the flagships experienced fewer declines than private schools,” Wood said.
Graduate programs fared better than undergraduate programs, with the steepest decline among freshman classes with a significant number of students deferring for a year. Ivy League colleges were harder hit, she said, because they moved to online classes more quickly than public schools.
“It’s not surprising, because typically undergraduate classes are in person and on campus,” Wood said. “Some graduate programs experienced enrollment growth. Most graduate programs were already hybrid in nature with classes offered online.”
Moody's Investors Service revised the sector’s outlook to stable from negative in March in anticipation of improving revenue prospects over the next 12-18 months as campus reopening plans were announced for fall 2021. The rating agency also cited stronger investment returns, a funding boost from additional federal aid via the American Rescue Plan and a steadier outlook for state funding.
Moody’s cautioned that despite the improved outlook, not all universities will benefit equally and the sector continues to face longer-term demographic changes and shifts in consumer preferences that may continue to constrain revenue growth for some colleges.
Moody's had had the sector on negative outlook since 2016.
In December, Fitch Ratings predicted that downgrades and negative outlooks would outweigh upgrades and positive outlooks in 2021 as universities continue to grapple with enrollment volatility, pressure on key sources of operating revenue including student fees, auxiliaries, and state support, with renewed student focus on access an affordability.
“More highly selective and flagship research universities will weather these challenges better due to their strong demand profiles, greater revenue diversity and typically larger financial resources,” Fitch's Director Emily Wadhwani said at the time.
Wadhwani anticipated a few bright spots like improved student demand with the return to the physical classroom. Market recovery of most endowment portfolios by December 2020 has also helped ease some pressure, she said.
