Two ratings agencies offered differing opinions Tuesday on the future of the U.S. higher education sector.
Moody’s Investors Service raised its U.S. higher education outlook from negative to stable as it sees steady revenue streams, solid reserves and strong operating performance at large comprehensive universities bolstering the sector over the next year to 18 months. Fitch Ratings kept a negative outlook in place, predicting continued operating pressures as challenges persist from a moderate number of students graduating from high school, limited public funding levels and slowing tuition growth.
The slightly more dovish outlook from Moody’s is a change from recent years, when that ratings agency pointed to factors such as hypercompetition, constraints on net tuition revenue growth and rising expenses when labeling the sector with a negative outlook. Many of those challenges remain for a significant slice of the sector, according to Moody’s, but they are being offset by alternative revenue streams like state funding, endowment income, gifts, research grants and income from academic medical centers that will help prevent conditions from declining materially.
Moody’s expects large comprehensive universities to fare the best, posting increases in operating revenue in the 3.5 percent to 4.5 percent range for the 2020 fiscal year. Small public and private universities will trail behind, raising operating revenue in the 2 percent to 3 percent range.
A small handful of wealthy colleges and universities are in a much stronger financial position than their peers. Just 10 universities hold about half of the wealth at all the private universities Moody’s rates. Public universities aren’t as well-off on the whole but still exhibit a substantial wealth divide, with comprehensive public universities holding about 90 percent of total cash and investments in the public university sector.
Moody’s predicts net tuition revenue will increase by 1 percent for public institutions and by 2.3 percent for private colleges and universities in the 2020 fiscal year. Growth in state appropriations, gift revenue and research grants and contracts is in line to come in at 3 percent.
Demographic changes, workforce needs and growing online programs are all risks or drivers that could transform the sector in the future, Moody’s found. It called governance a key differentiator between institutions, with proactive boards and management teams in a stronger position than those that are reactive.
Fitch, meanwhile, emphasized the relatively flat number of high school graduates in the country, state financial support for colleges that is impacted by states’ own revenue volatility and projections of slowing economic growth.
Still, Fitch expects stability among the group of colleges and universities that it rates for 2020. About nine out of every 10 institutions in the Fitch portfolio have stable outlooks, although the agency expects a widening credit gap between colleges with strong finances versus those that are heavily reliant on tuition or located in markets where competition and demographics pressures are high.