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Rating Agencies Issue Dour Higher Ed Outlook for Next Year

Two bond rating agencies on Tuesday issued pessimistic outlooks for the U.S. higher education sector for 2021 as the coronavirus pandemic continues to strain enrollment and revenue, heighten long-term pressures, and hit certain types of institutions harder than others.

Operating revenue will decline by between 5 percent and 10 percent across the sector, predicted Moody’s Investors Service, which issued a negative outlook for U.S. higher education. An estimated 60 percent of public universities and 75 percent of private universities are expected to see net tuition revenue decline amid soft enrollment — even as auxiliary revenue, philanthropy and state funding streams are under pressure.

At the same time, many colleges and universities have high fixed costs that are difficult to lower, Moody’s noted. Different institutions have made varying assumptions about when the pandemic will end. Such factors limit colleges’ and universities’ ability to adjust expenses in a timely fashion to match declining revenue.

Most institutions this fall experienced weak enrollment of first-time students and international students in particular, noted Fitch Ratings, which said the higher education sector outlook is worsening. Fitch expects flagship institutions and other colleges and universities that are highly selective to better handle the pressures than their less fortunate peers. They’re typically helped by their strong demand profiles, diverse sources of revenue and larger financial heft.

Colleges and universities have been using a number of different financial tools to address budget deficits, Moody’s reported. They include restructuring debt, deferring capital investments and taxable borrowing.

Better-off institutions have more access to these options.

“The highest-rated universities have been the most active in the capital markets, with good receptivity from investors,” said a report Moody’s issued on its rating outlook. “Lower- and non-rated universities have been less active, relying on banks for liquidity needs. As the pandemic continues to create a high degree of uncertainty across higher education, there is a rising risk that banks will pull back their exposure to the sector, which would leave many universities with fewer options to mitigate near-term operational stress.”

It’s possible the sector could see some recovery in the second half of the 2021 calendar year if the pandemic is in large part mitigated, which would allow colleges and universities to return to full on-campus operations, according to Moody’s. But the economic recovery is still expected to be uneven, pressuring net tuition revenue and state funding through the 2022 fiscal year and preventing a quick rebound for higher education.

The pandemic may also accelerate long-brewing technological shifts to make more use of online learning, suggesting institutions should think about meeting changing consumer preferences over the long term instead of merely reacting to short-term disruptions.

Fitch also noted a more competitive landscape with renewed focus on access and affordability.

“Rising discount rates across the sector continue to pose increasing pressures on net tuition revenue, particularly in a pressured enrollment and unfavorable demographic environment,” said Emily Wadhwani, director at Fitch, in a statement.

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