What's Behind Our Sector View?

Our sector view remains stable, supported by healthy demand and continued operating stability

Most of S&P Global Ratings' rated independent schools continue to experience enrollment growth, coupled with largely stable selectivity and matriculation rates, demonstrating healthy sector demand. While these demand trends have fueled solid operating performance, we believe that slower economic growth could lead to challenges for some independent schools in 2025, with the potential for more modest investment returns or effects on fundraising efforts. However, we expect fiscal 2025 operating performance will be consistent with the previous year, given easing inflation rates and strong market returns to date. We believe many independent schools retain tuition-rate flexibility, given continued high demand, which could offset any increases in operating costs. While the sector is somewhat self-selecting, it remains bifurcated, as longstanding schools with stronger demand and healthy endowments maintain greater financial flexibility, while smaller or less-selective schools with weaker endowment levels and financial resources face greater credit risk.

Outlooks and rating actions indicate continued credit stability

As of Feb. 4, 2025, 50 of our rated schools had a stable outlook and three had a positive outlook. We added nine new public ratings in the past year, expanding the geographic and rating category spectrum of our independent school sector. Throughout the year we raised one rating to 'A+' from 'A', lowered one rating to 'A+' from 'AA-' and placed two ratings on positive outlook (joining one from the previous year), with stable ratings across the remainder of the sector. We expect this trend of stability will continue in 2025.

Sector Top Trends

Enrollment and demand hold steady, but regional nuances and other factors could shift the landscape

Demand continues to grow across the sector.  Demand remains healthy, in our view, with more than 60% of our rated independent schools experiencing enrollment growth in fall 2024, while 8% increased enrollment by greater than 3%. In our view, the increasingly diverse, high quality, and flexible programmatic offerings of these schools have bolstered these trends within the sector, which has been relatively inelastic to price changes historically, and, in recent years, saw demand continue to increase despite higher-than-typical tuition increases. In our view, independent schools with less demand flexibility are likely to continue to face greater enrollment pressures relative to those of larger and more selective schools.

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Demographic trends could lead to demand pressures in certain markets.  Given the trend of declining U.S. birth rates in recent years, we believe attracting students will become increasingly challenging, particularly in markets that are experiencing a disproportionate decline in the school-age population. We note that much of the Northeast region, where 55% of our rated schools are located, is projected to experience a decline in the school-aged population over the next five years. We will monitor how independent school demand is affected in this region, particularly in areas with increased competition from high-quality private and public-school options. Ultimately, we believe independent schools in these environments will need to increase marketing efforts or reconsider their value proposition to maintain market share. On the other hand, certain states, mostly in the South, have benefited from expanding populations and economic growth, which will support demand trends in the near term.

International student enrollment volatility could affect some schools.  Although international enrollment has stabilized relative to early pandemic-related declines, changes to federal work program and visa policies could weaken independent schools that enroll a greater percentage of international students. Schools with a significant international population could face additional budget pressures as net tuition revenues would likely weaken, because international students are typically full-pay students, and tuition is not discounted. In response to some of these challenges, a few schools have considered reducing their recruitment of international students. However, the bulk of schools with international student populations remain invested and are aiming to diversify their international student base. Marketing to, and recruiting, students from a broader selection of countries could provide greater geographical diversity and help mitigate some of these risks.

Evolving financial-aid offerings and tuition needs are affecting enrollment decisions.  Independent schools have historically thrived in a relatively inelastic market. However, the pressure of balancing tuition increases, financial-aid needs, and long-term financial planning is intensifying, potentially presenting a challenge for these institutions. For the 2024-2025 school year, the average tuition increase across our rated day schools was 7.4%, which is above historical levels. This rise contrasts sharply with the growing availability of free, high-quality kindergarten-through-12th-grade options in competitive regions like Massachusetts, which hosts both a dense private school landscape and well-regarded public school system. To remain competitive, independent schools must continue delivering on a primary draw of private education, the ability to meet the demand for innovative curricula (such as STEM summer programs), which require integrating increased expenses and staffing needs into long-term financial projections. At the same time, schools are striving to continue to support socioeconomically diverse student bodies through financial aid, a decision with implications beyond one year's operations.

Given their reliance on fundraising and endowment draws, management teams continue to weigh the need for a robust and enduring donor base with the percentage of students receiving aid. While we have not yet observed declines in enrollment due to tuition increases, we are monitoring for any effects the increases might have on demand. We believe long-term financial sustainability will depend on effective management oversight and proactive evaluation of multi-year projections, demographic cyclicality, spend rate, and investment strategies.

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Expanding school choice and voucher programs across the country are shifting the competitive landscape.  Legislators in a growing number of states are advancing school choice bills, expanding the prevalence of voucher and Education Savings Accounts programs. These allocate state funds to students that opt into these programs, who can then apply these funds to homeschooling or the cost of attending an independent school. While we do not anticipate a significant increase in demand stemming from existing voucher programs (as current vouchers have not generally covered the entirety of independent school tuition), we are monitoring potential legislation, such as in Texas, that could favorably shift trends for lower-tuition schools. However, these programs could also push families that are seeking greater choice and freedom in curriculum or are otherwise dissatisfied with public school systems toward homeschooling, rather than to independent school options. While the effect is unclear, we will continue assessing how independent school demand trends evolve in response to the nationwide expansion of school choice programs.

Slower economic growth could affect fundraising, market returns, and affordability for independent schools.  S&P Global Economics predicts that economic growth will decelerate to 2.0% in 2025 from 2.7% in 2024, potentially posing challenges for the independent school sector should household budgets tighten. This could affect enrollment, demand, and fundraising, particularly for lower-rated schools. While most schools saw continued growth in annual fundraising, a slower economy could diminish the willingness and ability of families to contribute, especially alongside rising tuition costs. In addition, market fluctuations could heighten credit risk due to operational pressures stemming from decreased endowment draws or weakened financial resources over time.

However, almost all rated schools saw an increase in liquidity levels, and schools in higher rating categories could be somewhat insulated from larger economic effects. Endowment market performance remains positive, with schools across the rating spectrum reporting average growth in endowment values for fiscal 2024 of 10.3%. Historically, endowments have demonstrated resilience against short-term market fluctuations, supported by generally conservative investment practices, however, schools are increasingly allocating assets to higher-return investments like private equity, demonstrating flexibility and investment-management autonomy. We believe this strategic shift, coupled with the expertise of leadership teams and robust board-adopted investment policies, position many schools to effectively manage risks, increase endowments, and support financial-aid growth, even in a challenging economic environment.

Managing expenditure growth and long-term financial planning are key factors for schools.  While inflationary pressures have subsided, costs of salaries, supplies, and even contracted services remain elevated. We believe this has been mitigated by tuition increases and active cost-control measures by leadership teams. Some of our rated independent schools have begun to also consider expanded opportunities for revenue growth through increasing auxiliary programs, summer offerings, or other alternative revenue sources. Schools with less operating flexibility and historically lighter financial resources are likely to face increased operational pressures in 2025. We believe long-term financial planning, including potentially tightening expenditure assumptions and increasing reliance on revenue growth outside of annual tuition rate increases, will continue to play a significant role for independent schools.

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Financial flexibility continues to support capital planning and mitigation of event risks, but management is key.  Fundraising resilience since the onset of the pandemic has continued to aid the execution of capital planning. Many schools kept spending for capital projects despite the increased cost of labor and capital and we expect this trend will continue. We will also be monitoring the effects of the California fires on the construction market and how it could affect our rated schools in the region.

Historically, independent schools have benefitted from funding flexibility, and bank debt has been a popular form of financing for them. However, we have seen a material shift toward the public debt markets as regional banks tightened lending standards, leading to higher debt costs. We saw an uptick in public debt issuance for schools with weaker credit profiles, smaller endowments and balance sheets, and shorter operating histories, relative to our historically rated universe. For example, in 2024 we added nine schools, four of which are between the 'BBB' and 'BB' rating categories. We believe this trend could persist if the uncertainty in the regional banking sector continues, while bank options remain limited, and the relative value between interest rates on public and private debt is marginal.

Event risks remain at the forefront for management.  In our opinion, schools need strong controls around management and governance as they navigate many forms of risk and their effects on the school community. As we recently saw in California, natural disasters, like fires, can lead to displacement of communities that can challenge demand, in addition to the physical risk posed to a school's facilities. Furthermore, cyber, litigation, and school safety costs (among others) have continued increasing, requiring greater financial investment from schools. We believe this has the potential to pressure lower-rated schools with limited funds or those without proper planning around risk-mitigation and prevention strategies.

Independent School Fiscal 2024 Medians

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Ratings Performance

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