Industry Trends Over The Past Five Years

Ten years after the Great Recession, U.S. colleges and universities found themselves in a "new normal" environment characterized by greater competition and constrained operations, with the value of a college degree in question and all institutions forced to reevaluate their attractiveness relative to that of peers. S&P Global Ratings' sector outlook turned negative by the start of 2018, as additional pressures at the state and federal level combined with fewer opportunities in the capital markets, and remained negative leading into the COVID-19 pandemic. While we could not then anticipate the uniquely acute stresses the pandemic imposed on higher education, it accelerated challenges that had been building over time. Demographic pressures loomed on the horizon, long-term increases in institutional financial aid contributed to declines in net tuition revenue, and state appropriations for public institutions remained below pre-recession levels.

In 2020, the pandemic turned up the heat on the low-burning fires already stressing the higher education sector. Schools temporarily closed their doors and de-densified their housing. Many froze hiring, pension contributions, and salary raises. Some refunded students for campus closures, or faced lawsuits for not doing so to the full satisfaction of all students. International enrollment dropped rapidly under travel restrictions (after already decreasing since fall 2016 due to rising costs, visa delays, and a shifting political climate). Some students deferred enrollment, others dropped out entirely, and still others took advantage of the expanded online offerings and labor market upheaval to pursue degrees or certifications. Federal emergency relief bills eventually poured about $75 billion into the U.S. higher education sector, temporarily bolstering financial operations. In January 2023, S&P Global Ratings revised its sector outlook to bifurcated, noting that while less-selective, regional institutions would struggle amid intensifying competition, higher expenses, and operating margin pressure, highly selective institutions with solid resources and brand reputation would navigate these stresses more successfully.

In 2024, federal stimulus funds have been spent, investment markets have (somewhat) stabilized, and students are back on campus, bringing auxiliary revenues with them. Some ripples remain; smaller freshman class sizes will take another few years to graduate, and some schools now invest more heavily in mental health and tutoring resources for students still grappling with the personal aftermath of the pandemic. Still other impacts remain endemic.

Affordability and value proposition

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Following the Great Recession, competition in higher education surged dramatically. By 2018, prospective students and parents increasingly prioritized affordability and return-on-investment, especially as the cost of college steadily outpaced average inflation over the decade. While some institutions responded in the years since with a tuition "reset," drastically lowering the sticker price of attendance before gradually raising it again, these schools have anecdotally reported minimal success from such strategies, finding students more receptive to the perceived savings of a high discount rate rather than a lower base price. The broader market primarily increased financial aid packages offered to families, whether for merit, need, or a combination of the two. Some of the more prestigious private institutions made accessibility a particular highlight, as in the case of Bryn Mawr's recent expansion of its "no-loan" program for families making less than $110,000 per year. Many public universities have similarly leaned into their public mandate with greater aid, sometimes supported by statewide initiatives like Michigan's Achievement Scholarship, which provides up to $5,500 per year to students for five years.

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Families' focus on affordability now coincides with substantial inflation since 2018. Inflation likewise affects universities' regular operations, narrowing the fine line schools walk between keeping the cost of attendance low enough to attract students and still covering their own rising costs. While the median rise in operating expenses remained generally in line with inflation, save in response to temporary cost reductions in fiscal 2021, the median increase in tuition and fees (including room and board) in the past five years remained slightly below total inflation.

Of note, instruction-related expenses kept less than half-pace with inflation in the past five years, as universities reduced program offerings, trimmed administrative staff, and delayed salary and benefit increases. Given a general trend toward lower tenure rates and higher unemployment in the educational services sector than the overall population, universities have generally considered personnel (particularly administrative or support staff) a more flexible option for reduction compared with other fixed costs. However, universities require balance here, given the potential for cascading impacts if salaries and benefits are reduced to an extent sufficient to cause faculty strikes like those seen at Columbia College in Chicago.

Given the strain of ongoing expenses and an end to pandemic-related stimulus aid, median operating income dropped to negative for private universities for the first time in more than 10 years, and generally trended much closer to breakeven than it did before 2018. Public university margins remained steadier, given greater state support in the past five years. Some institutions responded to these pressures by dipping further into their endowments, especially following the substantial market returns in fiscal 2021. Others delayed capital projects, especially as interest rates steadily climbed in the last two years and raised the requisite debt burden associated with new issuance, leading to an ever-increasing median age of plant (particularly for private universities).

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Rating and outlook trends

Given the negative pressures on the higher education sector before the pandemic and the acute impacts thereafter, the rating distribution of institutions shifted distinctly to the negative for private colleges and universities in the past five years. Year-to-date, 49% of schools are rated in the 'BBB' and speculative-grade categories versus 40% in 2019, and 14% have a negative outlook compared with 9% five years ago. Public colleges and universities remained more stable over time, with approximately 10% rated 'BBB+' or below. In addition, 90% of public universities currently have a stable outlook, overall weathering the pandemic more favorably than the private sector given the benefit of state support. More public institutions now have a positive outlook than pre-pandemic at 7% versus 3%, respectively.

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Private university five-year trends

Given the myriad pressures affecting the sector, median private university enrollment has steadily fallen in the 'A' category and below. Across the board, tuition discount rates have increased, with those at 'BBB' category schools rising the most; however, the broad application of increased financial aid generally reduced their competitive edge. For the most pressured institutions, many cited new programming, changes in recruiting, and greater graduate or nontraditional enrollment as mitigation measures against demographic stress. Despite these efforts, the median undergraduate portion of enrollment also increased across all categories since 2018, as the shifting labor market and generally low unemployment rate pulled graduate students out of the market for higher education.

Institutions in the 'A' category and below are seeing worsening selectivity in an attempt to bolster enrollment; they're also seeing declines in retention rates as less-prepared students struggle to remain enrolled. Given the climbing discount rates, targeted to attract and retain students, operating margins also worsened for these categories. While the 'A' category median remained just above breakeven on a full-accrual basis, the already-negative margins for the 'BBB' category and speculative-grade institutions worsened into deeper deficits.

Solid investment increases, particularly in 2021, boosted financial resources across all rating categories, though the higher-rated institutions generally have more sophisticated investment management strategies and can take advantage of riskier high-return options. Given the relatively smaller investment returns for speculative-grade schools, the ratio of resources relative to rising operating expenses fell slightly, not keeping up with inflation as well as the other rating categories. Resource ratios relative to debt varied more, with all categories increasing their median debt outstanding in the past five years. Universities in the 'A' and 'BBB' categories were most conservative with their debt issuance compared with their increase in financial resources, mindful of their lower capacity for the additional burden, while those in the 'AA' category issued debt solidly in excess of their growth in investments, taking advantage of the drop in interest rates in 2020 especially. Given the rising average age of plant across the sector, combined with the heightened competition for students, institutions are frequently updating their capital plans to renovate residence halls (or add housing, if they manage to substantially expand enrollment), add modern classroom equipment for the most in-demand programs, and refresh welcome centers and common areas to make the campus more attractive.

'AAA' stability

Given the small number of institutions rated 'AAA', the associated medians can imply trends not actually experienced by the individual universities. In the past five years, we upgraded two institutions to 'AAA' and downgraded one to 'AA+' from 'AAA'. Because we upgraded two relatively small institutions, the 'AAA' category medians reflect an overall drop in enrollment and debt outstanding since 2018 and a small increase in the endowment market value compared with other categories. However, all 12 included 'AAA' rated schools saw modest increases in enrollment in the past few years, though most are not seeking to expand undergraduate enrollment, given their strategic targets and campus capacity. All likewise have higher endowments as of fiscal year-end 2023 than in 2020, though most recognized slight declines from the fiscal 2021 peak. Before the inclusion of the two upgraded institutions, the median endowment market value of 'AAA' rated institutions rose by 40.7% from fiscal 2020 to 2021, surpassing the average annual net returns of 30.6% from National Assn. of College and University Business Officers' included endowments over the same year. Finally, all but two 'AAA' rated schools increased their debt outstanding in the past few years as well, with 'AAA' debt issuance in the past five years peaking with the dip in interest rates in 2020. While universities in all other rating categories reduced their debt issuance in 2023 as interest rates rose rapidly, 'AAA' rated institutions slightly increased their issuance from the previous year, as they were better able to absorb the additional debt burden on their balance sheet and annual operations.

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Public university five-year trends

Public colleges and universities were generally more insulated from the pressures facing private institutions, given ongoing state support and often lower prices for in-state students. Continued decreases in median enrollment and matriculation rates highlight heightened competition for students, both from other universities and from the broader labor market, community colleges, or technical colleges. In response, the sectorwide in-state draw fell in each of the past five years as all institutions attempted to widen their student draw to combat demographic pressures. Both the highest- and lowest-rated institutions also increased the graduate and nontraditional portions of their enrollment. However, given the enrollment decreases in the 'BBB' category, this increase tends to indicate a corresponding drop in traditional undergraduates at the lowest-rated schools, particularly at smaller regional institutions that struggle to sustain the same brand recognition and draw as the larger public universities.

Median financial operations sectorwide remained positive but near breakeven (outside of the substantial amount of pandemic-related relief funds recognized in fiscal years 2021 and 2022), though schools in the 'A' and 'BBB' categories retained their median deficits. These lower-rated institutions have remained financially more stable than their private-sector counterparts, as the growing portion of state appropriations as a percentage of their revenue offsets the decrease in enrollment and related student-generated revenue. In the past five years, university endowment market values rose by 13% across the sector, spurred primarily by substantial market returns for schools rated above the 'BBB' category. Although debt outstanding likewise rose in all rating categories (aside from 'BBB'), the increase was generally outpaced or matched by the increase in investments. Public universities as a whole maintained slightly lower average age of plant than their private university counterparts, and all except the 'AAA' category reduced their age of plant, with steady investments in their campuses often supported by state money.

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Related Research

• U.S. Not-For-Profit Private College And University Fiscal 2023 Medians: Inflated Expenses, Deflated Support Contribute To Weaker Margins, July 18, 2024
• U.S. Not-For-Profit Public College And University Fiscal 2023 Medians: Rising State Funding Offers Hope Amid Continued Demand Pressures, July 18, 2024
• U.S. State Funding: Propping Up Public Universities In An Increasingly Competitive Landscape, July 18, 2024
• Rising Covenant Violations Are A Symptom Of The Pressure Facing Lower-Rated U.S. Higher Education Entities, June 20, 2024
• Financial Aid Delay Is The Latest Hurdle For U.S. Higher Education, Feb. 12, 2024
• Outlook For Global Not-For-Profit Higher Education: Credit Quality Divergence Continues, Dec. 7, 2023
• Federal Funds Kept U.S. Colleges And Universities Afloat; Some May Sink When They're Gone, June 2, 2022
• Recession, Recovery, Rivalry: 10 Years Of U.S. Higher Education Medians, July 2, 2019