Fiscal 2023 was a tough year for U.S. not-for-profit private colleges and universities. Enrollment declines resumed, after a brief period of stabilization in fiscal 2022. With pandemic relief dollars exhausted, institutions lacked a financial buffer to overcome rising expenses and demand pressures. Deeper tuition discounting further strained net revenue growth as institutions competed for students. As a result, median operating margins became negative for the first time in at least 10 years. Financial resources and balance-sheet ratios modestly fell. Reflecting these negative trends, the sector saw more than five times the number of downgrades as upgrades between June 1, 2023, and June 1, 2024. However, credit quality continues to diverge, consistent with our bifurcated outlook, with lower-rated institutions facing heightened difficulties.

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Rating Distribution And Characteristics

S&P Global Ratings maintained more than 300 ratings on U.S. not-for-profit private colleges and universities as of June 1, 2024. The sample size for our private college and university median ratios for fiscal 2023 is 278 (table 1). We do not include universities and colleges that we consider specialty schools in our ratio calculations. Given the niche focus of these institutions, which include medical schools, law schools, and arts schools, certain metrics may be skewed and would not be directly comparable with those of institutions with a wider array of program offerings.

Since our last medians report published July 25, 2023, we have assigned ratings to eight new private institutions: two in the 'A' category (including a specialty school), five in the 'BBB' category, and one speculative-grade.

During that same period, rating changes included 27 downgrades and five upgrades. The number of ratings in the 'AAA' and 'AA' categories was relatively flat: one institution, Dartmouth College, moved to the 'AAA' category from the 'AA' category. We downgraded six issuers to the 'BBB' category from the 'A' category and downgraded three to speculative-grade from the 'BBB' category. One institution, Medaille University, defaulted. All other rating changes were within the same rating category.

Ratings distribution is clustered around the 'BBB' category, which has 40% of private college and university ratings (chart 1). The next largest category, 'A', has 31% of ratings (chart 2). Although the majority of ratings, 83%, have a stable outlook, we revised some outlooks to negative in the past year (chart 3). Of rated issuers, 14% have a negative outlook compared with 10% the previous year. Currently, only 3% of private colleges and universities have a positive outlook, compared with 5% last year.

S&P Global Ratings' analysis of an institution involves a holistic view of its creditworthiness, including qualitative assessments that are not captured in this article. The mean or median metrics for each rating category (table 2) should not be considered thresholds to achieving a particular rating.

Table 1

Table 2

Chart 1

Chart 2

Chart 3

Enrollment And Demand Metrics

Demand pressures continued for lower-rated institutions

The higher education sector faces increased demand pressure. Across much of the U.S., the population of graduating high school students is shrinking. This "demographic cliff" results in lower demand from traditional student populations for private colleges and universities. In addition, some high school graduates are opting to work rather than pursue higher education as wages increase in a tight labor market. For others, the benefits of higher education do not appear to outweigh the rising price tag. While many institutions are increasing efforts to attract international students, adult learners, and graduate students, gains in these populations have largely been unable to overcome decreases in traditional undergraduates. In fiscal 2023 (fall 2022), median full-time equivalent enrollment fell 0.8% after stabilizing the previous year. Related demand metrics, matriculation and retention rates, also weakened. Other enterprise metrics were relatively stable.

Demand pressures are greatest for entities rated 'A' and below. Top-rated schools in the 'AAA' and 'AA' categories recorded stable enrollment in fiscal 2023. These institutions may intentionally target flat enrollment to maintain campus culture and selectivity. They benefit from greater operating flexibility with low acceptance rates, high matriculation rates, and a higher percentage of graduate students that diversify student composition. For example, 'AAA' rated entities have a median acceptance rate of just 6.0% and 63.5% of admitted students choose to attend, indicating exceptional demand. Once at the institution, nearly all first-year students, 98.0%, return for their second year. Conversely, 'BBB' rated schools admit a much higher percentage of applicants, with a median acceptance rate of 78.5%. Just 15.0% of accepted students choose to attend and 77.0% continue to their second year. It's much more difficult to maintain a stable student population under these conditions and we expect divergence in demand factors will continue to widen as the pool of traditional college-attending students shrinks further.

Financial Metrics

Inflated expenses and deflated support led to weaker operating margins

Once pandemic-related federal relief funds were depleted, many private colleges and universities lacked a financial cushion to overcome enrollment declines, increased discounting, and inflation. For the first time in at least 10 years, median and average operating performance was negative. Median revenue mix shifted back to pre-pandemic levels, with a decreased reliance on grants and contracts and a greater share of revenue from auxiliary sources. As institutions compete for a shrinking population of potential students, tuition discounting continues to rise, with an average discount rate approaching 45%. We expect fiscal 2024 results will show continued operating pressure.

Operating performance differed greatly by rating category. Median margins for 'AAA', 'AA', and 'A' rated entities remained positive while 'BBB' and speculative-grade issuers generated deficits. Lower-rated institutions had a particularly tough year, with an average operating deficit of 3% for 'BBB' rated issuers and 5% for speculative-grade rated issuers. Higher-rated institutions typically benefit from greater revenue diversity from research or health care operations and rely less on student-generated revenues. Colleges and universities in the top rating categories also have large endowments that can support increased discounting.

Balance sheets remained stronger than they were pre-pandemic

We primarily measure balance-sheet strength using an institution's cash and investments. However, we also consider liquidity and the degree to which resources are subject to restrictions. In fiscal 2023, median cash and investments fell modestly, continuing a trend of losses in fiscal 2022, albeit at a slower pace. Many colleges and universities used cash outside of the endowment or supplemental endowment draws to support weaker operations. However, institutions generated strong investment returns in fiscal 2021 and losses over the subsequent two years have not eroded those gains. Financial resources and balance-sheet ratios remain stronger than they were in fiscal 2020 but could continue to erode due to operating pressures in fiscal years 2024 and 2025.

While cash and investments dropped on average, endowments increased slightly, with a 1.8% increase in the median market value (table 3). The negative percentage change for the 'AAA' and 'AA' categories can be attributed to the upgrade of Dartmouth College: while the college's robust $7.9 billion endowment was previously at the high end of the 'AA' category, it is below the average for 'AAA' issuers ($19.4 billion). Both the 'AAA' and 'AA' categories have relatively small sample sizes, so the addition or removal of one issuer can have a large impact.

Table 3

Median debt fell, while age of plant crept up

New debt issuance was limited in fiscal 2023, in part due to high interest rates. Sectorwide, median debt fell by a modest 4%. However, median debt of speculative-grade entities rose more than 20%. Similar to the change in endowment values, the large negative change for the 'AAA' category can be attributed to the upgrade of Dartmouth College. The college's fiscal 2023 debt burden of nearly $1.0 billion was well below the 'AAA' average debt burden of $2.7 billion.

While sectorwide debt burdens declined, average age of plant (equal to accumulated depreciation divided by depreciation expense) continued to increase, reaching a median of 16.2 years. Many institutions might need to increase debt issuance or use reserves in the coming years to finance delayed infrastructure updates or add facilities that attract students amid increasing competition.

Table 4

What We're Watching

Demand pressure:   While preliminary data for fiscal 2024 (fall 2023) indicate enrollment decreases have lessened, we expect demand pressures spurred by demographic trends will continue over the next few years. In addition, government delays related to Free Application for Federal Student Aid processing are likely to exacerbate negative trends for private colleges and universities. Students facing uncertainty about tuition pricing might have opted to delay pursuing higher education or to attend public institutions or community colleges. Innovative teams that are able to adapt and manage communication with prospective students could see stronger results.

Management challenges:   Management teams face increased pressure as they navigate the scrutiny of investment portfolios, changes to admissions criteria, and on-campus protests. At the same time, many colleges and universities have undergone leadership transitions in the past year. As the role of college president becomes more difficult, recruiting top talent poses a greater difficulty with a longer timeline. Issues with risk management can also hinder donor relationships and student demand.

Capital requirements:   With high borrowing costs and rising construction costs, many institutions have delayed capital projects in recent years. As average ages of plant increases, colleges and universities will need to make investments in campuses to maintain facilities and compete for students.

AI:   Some administrators have begun to use AI for admissions, student affairs, and marketing. Institutions report using AI for chatbots to answer students' questions more quickly, to personalize outreach to prospective students based on their interests, or to identify students that require extra support. Although it's still nascent technology, we expect AI could provide a competitive edge to early adopters.

Continued credit bifurcation:   We expect less-selective, regional institutions with weaker balance sheets will continue to face greater operating difficulties and an increased risk of covenant violations (see "Rising Covenant Violations Are A Symptom Of The Pressure Facing Lower-Rated U.S. Higher Education Entities," June 20, 2024). However, we expect institutions with high demand, revenue diversity, and robust financial resources will maintain or strengthen their positions.

Appendix

Table 5

Table 6