Ratings analysts see a darker outlook for higher education in 2021 as the effects of the pandemic continue to erode revenues and enrollment.
"Reduced enrollment will lead to tuition revenue declines at a majority of public and private universities, while reductions in auxiliary revenue, such as that earned from housing and dining, will also be significant for some," said Moody's Investors Service analyst Michael Osborn. "Other revenue sources, such as state funding and philanthropy, will also come under increasing stress as the pandemic persists."
Downgrades and negative outlooks will likely outweigh upgrades and positive outlooks in 2021, according to Fitch Ratings.
“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," said Fitch director Emily Wadhwani.
Operating revenue across the sector will decline 5% to 10% as universities face near-term shocks to key business lines, according to Moody’s.
“Sector-wide enrollment softness will lead to net tuition revenue declines at an estimated 60% of public universities and 75% of private universities,” Osborn said. “For some, reductions in auxiliary revenue, such as housing, parking and athletics, will be material as colleges have pivoted to remote learning and limited the number of students on campuses. Stress on other key revenue streams, such as state funding and philanthropy, will rise as the effects of the coronavirus pandemic persist.”
Nearly 43% of all prospective students are considering delaying starting a new one- to two-year program in higher education, according to a November research report from LaneTerralever, a national marketing and advertising agency for higher education.
“Whether for financial reasons, which is the pandemic’s biggest impact on students’ path to education, or a complete reevaluation of the path they want to follow — nearly 67% of students are now considering other career or degree/certificate program options,” according to the report. “Most students have untethered themselves from their pre-pandemic education plans.”
Although widespread availability of a coronavirus vaccine could begin to ease pressures on colleges and universities during 2021, the longer term economic and behavioral impact could last longer, according to Fitch.
“Unfavorable demographic trends in certain regions and markets are likely to exacerbate existing affordability and competitive concerns,” Wadhwani noted.
Declining enrollment will add to pricing pressures for universities that derive most of their income from tuition, analysts said. To adjust for falling family incomes, the schools will add more discounts and student aid, which erodes tuition revenue.
“The most vulnerable to these tuition pricing and discounting pressures are smaller, private institutions with high reliance on net tuition and student fees,” Wadhwani said. “Across the sector, rising discount rates continue to pose increasing pressure on effective pricing power, particularly in a pressured enrollment and unfavorable demographic environment. We expect this constraint to persist in a post-pandemic environment.”
In the LaneTerralever survey, 40% of students indicated they are being forced to explore other financial support options as a result of the pandemic. Of those who are likely to pursue higher education, 37% said they are most likely to self-fund their education.
“For many, the question is whether remote learning provides enough value,” the report said. “Only 35% of traditional students find remote learning extremely valuable, while 43% of nontraditional students say it is.”
For the institutions, debt refundings, taxable borrowing and deferring capital investments will remain important in maintaining budget flexibility, according to Moody’s.
“Ongoing access to the capital markets is a strength for the sector, and some universities have accelerated borrowing that would have been undertaken in the next year or two, taking advantage of low interest rates,” Osborn said.
With Congress considering a $908 billion pandemic relief measure, the American Council on Education and 100 other associations representing higher education sent a letter to congressional leaders itemizing the need for $120 billion to cover losses in the pandemic.
“The situation currently facing America’s colleges and universities is a crisis of almost unimaginable magnitude,” reads the letter signed by ACE president Ted Mitchell. “Colleges and universities have already pushed their financial capacities to the limits in addressing this crisis.”
The letter said many states are cutting support for higher education as they confront their own budget constraints.
“These cuts, while not universal, are the norm among institutions we’ve heard from,” the letter said. “At the 44 public institutions who provided detailed information to us, 32 reported that their state has implemented budget cuts ranging from 5% to 58% of overall support, with the average cut being 11.3%.”
Analysts expect the sector to face a friendlier administration in January after Joe Biden takes office.
Key tenets of President-elect Biden's platform including student debt forgiveness, an increase to Pell Grant award limits, and an overhaul of loan forgiveness programs could be scaled back and/or delayed, Fitch wrote. The existing interest-free, suspended payment period on student loan borrowings will be extended beyond the Dec. 31, 2020 expiration.
“While a divided Congress may create obstacles, it is likely some key tenets of President-elect Biden's platform regarding Deferred Action for Childhood Arrivals students and other student debt relief policies may proceed in some form,” Wadhwani said.
