• July 25, 2014

Outlook for Higher Education Remains Mixed, Moody's Says

In a report released on Monday, Moody's Investors Service sticks with the mixed outlook for higher education that it established last year: For leading colleges that are well managed and diversified, the market is looking stable. For the rest, not so much.

The outlook report, which is released annually at the beginning of the year, says that a majority of colleges—those dependent on tuition or state money—will continue to face challenges in the next 12 to 18 months. Those challenges will, in part, stem from the public's scrutiny of rising tuition and from pressures to keep it down. Analysts at the credit-rating agency also expect demand to rise for admission to the largest and highest-rated institutions, while other colleges may struggle to attract students.

The Occupy protests and other events have put intense focus on college tuition. "Tuition levels are at a tipping point, and the cost of college will be a critical credit factor for universities to manage long-term," the report says. "We expect that the pace of future net tuition revenue growth, both on a total and a per-student basis, will be much lower than the strong growth experienced over the past 10 years."

A declining yield in admissions is troubling trend, the report notes. Many colleges may appear more selective, but only because more students are applying to more colleges. "Median freshman yield rates (percentage of accepted freshmen who chose to enroll) at both private and public universities have steadily declined over the past five years, highlighting increased competition," the report says. "The trend of declining yield is particularly notable for the lower-rated private colleges, which are increasingly competing with lower-cost public colleges and feeling the most pressure to slow tuition increases and offer more tuition discounting."

Demand for some graduate and professional programs, particularly in business and law, is also softening—perhaps because the public doubts the payoffs those programs promise. "Historically, demand for these types of programs was countercyclical with the economy," the report says, adding that enrollment in graduate programs dropped in 2010. "We have anecdotally heard that recruitment for top students to these types of professional programs is fierce, with law and business schools increasingly using strategic financial-aid offerings to attract top talent and secure entering class sizes," the report says.

The Moody's report addresses a key question: Is the higher-education model fundamentally broken? Moody's analysts maintain that the business model is "generally sound and long-lasting," but that higher education will have to innovate in a number of ways to remain viable. Such innovations might include collaborations between colleges, more centralized management, more efficient use of facilities, a reduction in the number of tenured faculty members, and the geographic and demographic expansion of course offerings.

The report is available online to Moody's subscribers.

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