Lower tuition rates may mean more downgrades in FY 2020

Register now

Analysts predict a new fiscal year will bring declines in tuition for colleges and universities, which may further hurt their credit ratings on top of a recent history of downgrades.

In fiscal year 2020, about 27% of public universities will see declines in net tuition per student and the same goes for private universities, according to a recent Moody’s Investors Service report.

Lower tuition rates along with other factors, may change credit ratings for the worse, Moody’s said.

Challenges in the market, declining enrollment and in net tuition revenue have been cited in many negative rating actions said Susan Fitzgerald, associate managing director at Moody’s

“Since the end of the recession across the sector, downgrades have continued to outpace upgrades for the sector,” Fitzgerald said. “We currently have a negative outlook for the sector.”

Public and private universities are facing enrollment challenges as the number of high school graduates have stagnated, competition has proliferated, and students have become more focused on tuition affordability.

“Public and private universities are increasingly competitive over recruiting students and the number of high school graduates is relatively flat across the country,” said Patrick McCabe, Moody’s analyst. “So that’s increased competition for a pool of students that isn’t really expanding at the national level.”

State appropriations could also have a negative impact on credit ratings, as schools find themselves exposed to decisions made by state legislatures.

Moody's downgraded the University of Alaska in July and gave it a negative outlook following an over 40% cut in the university’s appropriations from the state.

In general, with a relatively healthy economy, there is more stability in state appropriations, McCabe said.

Some states such as Virginia and South Carolina are offsetting tuition freezes at universities by increasing appropriations.

As for fiscal year 2020, analysts said the outlook will depend on how universities and colleges adjust to these challenges.

“The slowing of net tuition revenue at public and private universities is something that will remain a general credit challenge for universities and colleges to adjust to,” McCabe said. “The ability of an individual institution to mitigate pressure on enrollment or net tuition revenue will continue in fiscal year 2020 and beyond in determining individual credit quality.”

Some analysts have decided to stick with highly rated bonds in the higher education sector.

“The higher education area, depending on if it’s public or private has seen some declines (in enrollment) over the years, especially in the private colleges,” said Patricia Healy, senior vice president of research and portfolio manager at Cumberland Advisors. Private universities have seen more downgrades than public universities, Healy later added.

Healy said Cumberland looks for double-A and higher single A-rated bonds because high-quality bonds tend to be more liquid and the firm tends to take a more active strategy.

Healy said her firm stopped investing in many private colleges years ago due to the continuing decline in enrollment. Healy said a decline in enrollment can be a reflection of a good economy because people are going directly into the workforce.

Universities, public and private, that have big endowments and solid reputations are doing fine, Healy said. For public universities, it depends on how much state appropriations they are allotted.

“States want to make sure there’s higher education for the people in their state that they can afford so that’s why they do the state appropriations,” Healy said.

For reprint and licensing requests for this article, click here.
Higher education bonds Bond ratings Credit quality Moody's Washington DC