The way colleges and universities have reacted to the uncertainties driven by expected policy challenges from the Trump administration was a driver in Moody's Ratings decision to lower its outlook on the sector to negative.
"It's not so much because of one particular policy or what we think the effect of those might be, but rather, what the colleges themselves are doing in this environment," said Emily Raimes, associate managing director at Moody's, said of last week's outlook revision.
Moody's typically doesn't adjust ratings or outlooks based on policy announcements until it's clear that those policies will be enacted, Raimes said. But colleges and universities haven't waited — they've begun hiring freezes and spending cuts, dialed back research and rescinded offers to Ph.D. candidates.
"The sector is not so much being affected by an individual policy or policies being enacted, but rather because of all of the uncertainty around which policies will be enacted," Raimes said.
The report on the outlook change outlined seven potential policies that could
Those policies were: cuts to the National Institutes of Health; federal enforcement actions related to Diversity, Equity and Inclusion programs; restructuring or eliminating the Department of Education; a reduction or interruption to Pell grants; changes or disruptions to federal student loans; an increase to the endowment tax; and a reduction in foreign student visas.
The most severe impacts would come from the NIH cuts and any changes to Pell grants and student loans, Moody's said. The Trump administration has attempted to cap reimbursement rates for certain NIH research costs at 15%, which is being challenged in court.
The administration has said it will not cut Pell grants or student loans, but eliminating the Department of Education that administrates them could damage those programs in a way that hurts the sector, Raimes said.
"The smooth flow of [grants and loans] is very important," Raimes said.
Moody's placed a negative outlook on higher education for much of the COVID-19 pandemic, Raimes said, but revised the outlook back to stable at the end of 2023. It reaffirmed that stable outlook at the end of last year.
Since then, there's been a "noticeable shift," Raimes said.
Fitch Ratings has had a negative outlook on higher education from 2023 onward, according to Fitch senior director Emily Wadhwani. That view has "certainly been reinforced by the increasingly challenging federal policy landscape," Wadhwani said via email.
"This adds to an already difficult operating environment as colleges and universities grapple with limited tuition growth prospects and a state funding trajectory that is slowing down," Wadhwani said.
"The pandemic highlighted the relatively significant capacity that many institutions have to adjust their operations when necessary," she said. "However, that capacity becomes increasingly limited as we move further down the rating scale, particularly as we move into below investment grade ratings."
Many of the universities that have experienced recent threats from the federal government are the wealthiest, highest-rated institutions, with Columbia University an obvious example after it capitulated to Trump administration demands earlier this month to avoid losing hundreds of millions of dollars. They'll be able to absorb the negative impacts, Raimes said, but attacks on those schools will add to the uncertainty that's hurting the sector as a whole.
The uncertainty provides a further threat, Raimes said, because university leadership will be distracted by the federal chaos, "and how it affects them, and how to prepare for it, and what actions to take."
For a sector that was already troubled, Raimes said, the distraction from strategic planning is its own risk.
