The rapid spread of COVID-19 creates enormous uncertainties about the health of U.S. colleges and universities.
Higher education institutions are confronting potential operating and enrollment pressures after COVID-19 contagion risks prompted campus shutdowns in March. Schools were also forced to shift to online-only classes with many also offering partial refunds for housing and tuition costs.
Moody’s Investors Service analyst Susan Fitzgerald said that many colleges, especially smaller tuition-dependent schools with low endowments, were already grappling with severe fiscal challenges even before COVID-19 took hold.
Schools are now facing increased enrollment uncertainty for the fall 2020 semester because of canceled admissions events with many opting to extend deadlines for final decisions from students from May 1 to June 1.
“This is a shock to the system,” Fitzgerald said. “The schools that were already struggling will have much less flexibility for how to respond.”
Moody’s revised its 2020 higher education outlook to negative from stable on March 18 citing fiscal headwinds caused by COVID-19 and future downside risks.
While the duration and full financial impact of the ongoing crisis are unknown, colleges are facing reduced revenue and higher expenses in the near-term along with “unprecedented enrollment uncertainty” for the 2021 fiscal year that begins July 1, according to Moody’s.
“Colleges are trying to be as financially conservative as possible over the next few months until they have a better sense of the scope of the coronavirus crisis and their enrollment numbers for the fall semester,” said Robert Kelchen, a higher education finance professor at Seton Hall University in New Jersey. “Most colleges have implemented hiring freezes and tried to cut spending in other ways to help compensate for refunding a portion of room and board charges. For right now, colleges are in survival mode until the crisis passes.”
Fitch Ratings credit analyst Emily Wadhwani noted that tuition-dependent colleges with limited liquidity that rely heavily on endowment draws are most susceptible to operating risks and small shifts in enrollment.
Wadhwani said about 1,500 small private liberal arts colleges fall into this category throughout the country, with many concentrated in the Northeast.
“These are the types of schools we will be watching very closely over the next few months,” Wadhwani said. “It takes fewer students at these schools to be disruptive from a revenue perspective.”
A number of small tuition-dependent colleges in the Northeast have already been forced to shutter in the past year amid enrollment struggles and increased competition for a shrinking pool of college-age students in the region.
In Vermont, College of St. Joseph,
Newbury College in Brookline, Massachusetts, and the College of New Rochelle in New York's Westchester County also shut down.
Wadhwani noted that operating risk could result from lower dorm occupancy, prolonged restrictions on student, faculty or staff access and shuttering branch campuses abroad.
She said campus closures only lasting a few weeks will not likely affect operating performance, but revenue pressures will grow during extended shutdowns from lost fees for services like housing, dining and parking if sustained into the fall 2020 semester. The “summer melt” effect that can lead to students not returning to campus after returning home will also be closely examined given chaotic conditions facing colleges now, according to Wadhwani.
“We are keeping a close eye on the dislocation of students,” Wadhwani said. “We want to see if the summer melt become more pronounced this year.”
Fitzgerald noted that just over 30% of public universities and nearly 30% of private colleges were already running operating deficits before the virus outbreak making reserves or operating cash flow that much more crucial to weather the storm.
Colleges with a combination of weak operating performance and low liquidity comprise around 5-10% of Moody’s-rated higher education credits and will face “critical stress” under a downside scenario, according to Fitzgerald.
While public universities face risks from likely declines in state aid for higher education during a recession, Fitzgerald stressed that “significantly struggling” public schools will benefit from potential outside support not afforded to private counterparts.
The West Virginia Higher Education Policy Commission for example has identified internal reserves that can be tapped for liquidity relief and is working with public universities in the state for additional contingency plans.
A disruption of international students attending U.S. colleges because of concerns about health and travel during COVID-19 would pose a “substantial” credit risk for about 10% of Moody-rated schools that garner more than 10% of their revenue from this source.
Many international students pay full tuition and colleges have already been hit with enrollment declines from across the globe prior to COVID-19 because of changes in immigration policy under the Trump administration, according to Moody’s.
College enrollment headwinds in the wake of COVID-19 also present challenges to bond-financed student housing projects.
S&P Global Ratings revised its outlook on. U.S. higher education privatized student housing projects to negative on March 25 citing a potentially prolonged decline in occupancy and associated losses of rental revenue after colleges moved to remote learning in the middle of the spring semester.
S&P credit analyst Jessica Wood noted that the majority of its 63 ratings on privatized student housing projects are secured by a non-recourse pledge of net housing project revenues with a small number also benefiting from additional financial support from the sponsored colleges. The negative outlook period will last two years for investment grade ratings and one year for nearly a quarter of S&P’s student housing credits rated at junk-level.
“Many student housing projects will be more susceptible to near-term operating pressure associated with decreased occupancy and potential rental revenue refunds, and could require the use of reserves to meet debt service payments in full and on time,” Wood wrote in Wednesday's report. “Since these projects' bonds are typically secured solely by project cash flows non-recourse to the sponsor institution, they rely upon student occupancy and rental revenue generation, and are most vulnerable to missed revenues.”
Colleges with large endowments such as Ivy League institutions are better positioned to withstand near-term financial losses, but these schools also face risks because of volatility in the financial markets that would result in declines in endowment income available for operations and drops in philanthropy, according to Fitzgerald.
While private colleges typically rely more on endowment income, Fitzgerald noted that public universities have become increasingly reliant on gifts and endowments to support capital projects.
“This crisis will hit all of higher education,” Fitzgerald said. “Nobody is immune.”
