How fall classes play out amid coronavirus is key for higher education

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Uncertainty surrounding whether U.S. colleges and universities can safely open their doors to students this fall during the COVID-19 pandemic adds stress to an already challenged higher education sector.

The coronavirus outbreak forced campuses nationwide to shut down in early March with schools forced to shift to online-only classes midway through their spring semesters.

An empty University of Baltimore classroom in April. How and when colleges and universities can fill classrooms with students remains an open question.

Many schools offered partial refunds on housing and tuition costs. Higher education leaders are now bracing for even deeper losses in the fall with enrollment expected to nose dive as students grapple with unknowns about whether they will be able to receive in-person instruction.

While the fall semester doesn’t begin until late August for most college students, a number of schools have released statements this spring about reopening, cautioning that ultimate decisions will hinge on safety based on guidance from health officials.

Yale University plans to announce a decision on the fall semester by early July after the Connecticut Ivy League school formed six COVID-19 contingency planning committees tasked with forming recommendations for how to safely operate during the next year. Yale is better positioned than other more tuition-dependent colleges, with an endowment north of $30 billion and high student demand as one of the top academic schools.

“Many institutions are scenario planning and are planning to open campuses in the fall in some form,” said S&P credit analyst Jessica Wood. “They are all working very hard to come up with creative solutions.”

The unknowns now will affect whether students return or freshman enroll. They may be less inclined to pay the going rate at many schools if they'll be stuck taking remote classes over Zoom from their childhood bedrooms.

Four-year colleges face potential enrollment losses of 20% this fall, according to recent student surveys conducted by SimpsonScarborough. Ten percent of surveyed college-bound seniors who had planned to enroll at a four-year college before the COVID-19 outbreak said they had already made alternative plans.

Wood noted that colleges are exploring a variety of options for the fall that could include a mix of online and face-to face instruction while limiting large lecture classes to enable social distancing.

Some schools have also explored housing some students in nearby hotels to provide more spacing in residence halls.

Sixty-five percent of college finance officials polled during a May 5 S&P webinar on U.S. higher education credit conditions indicated that a partially opened campus with more limited options and smaller class sizes was the most likely scenario. A far smaller percentage of the roughly 200 polled (14%) said they were leaning toward beginning the semester online for a month or two before transitioning to in-person classes. Eight percent were eyeing an entirely remote semester.

The loss of auxiliary revenue from fees for housing, dining and parking along with revenues from athletics and theater events creates a material hole for many colleges that started with campus closings this spring that will worsen if fall openings are not allowed, according to Wood.

Institutions with associated healthcare systems also face possible “significant” lost revenues from canceled elective surgical procedures, Wood said.

S&P revised the outlook on 117 lower-rated U.S. higher education credits to negative from stable on April 30 due to heightened risks associated with the financial toll caused by the COVID-19 pandemic and related recession. This raised S&P’s percentage of higher education credits carrying negative outlooks to 38% from 9.2% at the end of 2019.

Wood noted that COVID-19 is already wreaking havoc with 2020 college budgets even before next year’s revenue struggles, particularly at public institutions facing lower state appropriations.

New Jersey’s Rutgers University, which saw the S&P outlook on its A-plus rated bonds cut to negative from stable, is expecting a $200 million shortfall in budgeted revenues for the 2020 fiscal year ending June 30, according to an April 24 letter from its president, Robert Barchi.

The Garden State’s flagship public institution is receiving $54 million under the federal Coronavirus Aid Relief and Economic Security Act.

While the CARES Act will provide some relief to higher education institutions, Wood said colleges are facing “an unprecedented level” of near-term operating stress and tightened liquidity that will worsen the longer campuses remain largely virtual or are governed by social-distancing rules.

She added that endowments will also suffer from declining investment performance during the current recession with colleges also facing additional credit pressures from possible fundraising dips.

“The longer this goes the harder it will be for schools with less financial flexibility.” Wood said. “Smaller schools with much less revenue flexibility are going to be further pressured.”

Yale University, shown in 2015, plans to announce by early July whether its New Haven, Connecticut, campus will open for in-person classes this fall.

Moody’s Investors Service revised its 2020 higher education sector outlook to negative from stable on March 18 citing aftershocks triggered by COVID-19 and future downside risks.

Colleges with large international enrollments face particular revenue struggles this fall if global travel restrictions are prolonged or the global economic downturn prompts more foreign students to study in their home counties, according to Moody’s analyst Dennis Gebhardt.

“These international students tend to be full-paying students,” Gebhardt said. “It is an important part of the revenue mix for many schools.”

Decisions on college openings may vary by region with individual governors playing a role. In Connecticut, Gov. Ned Lamont created a task force aimed at gradually reopening colleges across the state over the summer in hopes that they can be ready for the fall if COVID-19 conditions improve.

Uncertainties about campus opening plans and social distancing guidelines this fall means unknowns for the 2020 college football season. Postponing college football to the spring has been explored in order to salvage an important revenue stream that supports other athletic teams.

Fitch Ratings credit analyst Emily Wadhwani said the loss of football and to smaller extent college basketball would be a major financial blow to bigger schools and would likely result in a reduction of other athletic teams.

The possibility of college football played without fans or with reduced attendance to enable social distancing would also hamper many athletic budgets, but schools could still gain revenues from lucrative television rights deals in leagues like the Big Ten and Southeastern Conference, according to Wadhwani.

“If we re-open campuses but there is no football it reduces a meaningful revenue stream at many schools,” Wadhwani said. “This is a big money maker at many Division I schools.”

Before the pandemic, the higher education sector faced a new challenge because of the National Association for College Admission Counseling removed language from its code of ethics last year prohibiting offering incentives to students already committed to schools.

Wadhwani said the uncertain situation facing colleges because of the pandemic will likely lead to even more aggressive recruitment for incoming and transfer students.

“The regulatory gloves have comes off a bit,” Wadhwani said. “The landscape is shifting under our feet.”

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