The credit outlook for higher education remains negative for the second year in a row, according to the latest report from Moody’s Investors Service.
The next year and a half is expected to be grim because of low revenue growth from tuition, the primary source of revenue for colleges and universities, says the report, which was released on Tuesday by the credit-rating agency. Other sources of revenue, such as state funding for public colleges, should be stable, but Moody’s predicts that operating expenses will outpace revenue growth at most institutions.
Sustaining the College Business Model
“Operating revenue growth will remain low for many four-year colleges and universities over the outlook period, resulting in continued challenging business conditions,” wrote Susan Shaffer, a Moody’s vice president, in the report. Concerns about “affordability and return on investment” also will constrain the growth of tuition revenue, according to the report.
Last year Moody’s downgraded the outlook for higher ed from “stable” to “negative.”
Labor is the biggest cost for universities and colleges, accounting for up to 75 percent of expenses at most institutions. Delivering a high-quality education is labor-intensive and expensive, said Nicholas Hillman, an associate professor of educational leadership and policy analysis at the University of Wisconsin at Madison.
“It’s just the nature of the beast,” he said.
Colleges and universities are expected to control those costs in the coming year, but doing so will create long-term challenges, the report says. For example, spending in areas like academic programming and technology are essential to institutions’ competitive edge.
The report does not present all bad news. Higher education should adapt to systemic changes, it says. “The sector has amassed healthy financial reserves during the outlook period following several years of robust investment returns,” according to a news release on the report.
What would it take to turn things around and achieve a stable outlook? That would require an expected revenue growth of at least 3 percent, the report says, at a majority of colleges.
Copies of the report are available to Moody’s subscribers.