S&P Global Ratings believes heightened credit risks for U.S. colleges and universities with significant federally funded research are growing, given evolving policies that might reduce or delay the funding, or potentially limit indirect cost recovery rates. Depending on the significance of research funding cuts, R1 and R2 institutions could experience financial pressure; we believe R1 universities (those with very high research spending and doctorate production) are disproportionately affected.
What's Happening
The new administration has made some federal research funding contingent on particular universities executing certain policy changes. Although schools receive some funding from states and local sources, philanthropy, internal cash flow, endowment income, and other organizations, federal money is the primary source. Material cuts to federal research funds could create operating pressures.
Following federal inquiries into grants and contracts, institutions facing material research funding cuts include Harvard University (AAA/Stable), which had all federal grants and contracts frozen (approximately $2.2 billion, per the federal government). The federal government also cancelled $400 million in grants and contracts for Columbia University (AAA/Stable). Some material research contracts were also frozen or cut at other schools, including Princeton University (AAA/Stable), Cornell University (AA/Stable), Johns Hopkins University (AA+/Stable), Brown University (AA+/ Stable), and Northwestern University (AA+/Stable).
In addition, institutions that receive federal research grants periodically negotiate reimbursement rates for indirect costs (such as facilities and administrative costs) with the granting agencies. Proposals capping indirect cost recovery rates for research grants at 15% (negotiated rates are typically between 30% and 70%) from the National Institutes of Health (NIH) and the Department of Energy (DOE) would lead to a reduction in revenue for these research organizations. A federal judge's order blocked the NIH proposal in February, but the NIH recently filed an appeal with the U.S. Court of Appeals; the DOE announced its plan on April 11.
Why It Matters
Depending on a school's diversity of revenue sources and reliance on research funding, material cuts to federal research funds would create operating pressures for institutions. Management teams will need to assess budget options to offset revenue loss, including possible expense cuts, layoffs, and reduced research programming. Should federal agencies implement a permanent indirect cost recovery cap of 15%, additional revenue loss could have further financial implications. In our view, most of the universities navigating possible decreases or delays in research grants benefit from sound financial positions with robust liquidity and flexibility, as well as management expertise to face short-term funding fluctuations or disruptions.
What Comes Next
Federal policy uncertainties regarding research funding and reimbursement would primarily affect R1 and R2 universities, which are generally higher rated and maintain strong creditworthiness. So far, there has been no discussion or announcement around possible cuts to federal financial aid, Pell grants, or student loans--which would negatively affect the sector more holistically.
We believe the universities affected by these announcements have adequate reserves to provide flexibility should material cuts transpire, especially as they could be phased in over several years. Institutions that rely more heavily on federal revenues could be more deeply affected; however, the magnitude of potential cuts remain unknown, and our credit rating analysis incorporates strong fundamentals including the strength of management, liquidity, and financial flexibility. We'll continue monitoring federal policy changes to research funding and their impacts on the higher education sector, on a case-by-case basis.
Related Research
- U.S. Not-For-Profit Higher Education Outlook 2025: The Credit Quality Divide Widens, Dec. 5, 2024
- Academic Medical Centers And The Intersection Of U.S. Not-For-Profit Higher Education And Acute Health Care, March 25, 2025
- U.S. Not-For-Profit Sector 2025 Outlook: Credit Quality Continues To Show Resiliency Despite Uncertainty, Feb. 24, 2025
This report does not constitute a rating action.
| Primary Credit Analyst: | Jessica L Wood, Chicago + 1 (312) 233 7004; jessica.wood@spglobal.com |
| Secondary Contacts: | Laura A Kuffler-Macdonald, New York + 1 (212) 438 2519; laura.kuffler.macdonald@spglobal.com |
| Jessica H Goldman, Hartford + 1 (212) 438 6484; jessica.goldman@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.