INSIDE HIGHER ED. JAN 11, 2013. Economic and demographic shifts are undermining the ability of all but the most prominent colleges and universities to profit off high tuition prices, according to a survey released Thursday by Moody’s Investors Service. The finding suggests deep financial trouble for a large number of institutions.
One-third of colleges and universities expect net tuition revenue – the amount collected after subtracting aid – to either decline or to increase at a rate less than inflation for the 2013 fiscal year, according to the survey. If such declines and stagnant growth materialize, they could mean big problems for tuition-dependent institutions, including budget cuts and layoffs, increased borrowing and, for those hardest-hit, potential closure.
Moody’s attributes the potential declines in net tuition revenue to several consecutive years of depressed family income and net worth and uncertain job prospects for recent graduates that have weakened pricing power and enrollment pressure at colleges and universities. Competition for students, which often leads to colleges discounting tuition – by an average of 43 percent at private colleges, according to a study last year – is also hurting the bottom lines of many institutions.
“Tuition-dependent colleges with limited brand recognition are the most vulnerable to market pricing resistance,” the report states. “These universities and colleges typically have smaller enrollments, more regional student draw, thinner endowments supporting financial aid initiatives, and strong competition from lower cost options.”
According to the survey, 18 percent of private universities and 15 percent of public universities project net tuition revenue declines for the 2013 fiscal year. Half of all colleges and universities — mostly small institutions with a high dependence on tuition, low selectivity and a regional draw – reported lower enrollment for fall 2012 than for the previous year.
The report reflects the responses of 165 not-for-profit and 127 public institutions that the agency rates. Previous Moody’s surveys on net tuition revenue have tended to be more pessimistic than actual results, so it is likely that colleges will see more revenue than they predict.
The Moody’s findings build on several years of concern about diminished pricing power. Last year, Sallie Mae, in a survey of students and parents found that for the second straight year, families – particularly wealthy families – were spending less on higher education than in the previous year. While the survey’s findings are more complicated than they seem at first glance, they do hint at a growing concern about the price of higher education, reflected in numerous politicians’ calls for low-cost degrees, tuition freezes, increased financial aid and ending the use of tuition revenue for financial aid.
The Moody’s report is just one more piece of evidence of the challenges facing the traditional financial models for all but the most well-known institutions. The past four years have depressed all other sources of college university revenues – state and federal government funding, investment returns and fund-raising, and revenues from health care services. Other studies are predicting continued constraints on endowment returns and fund-raising prospects and stagnant state funding for institutions and state grant programs. Federal budget debates could affect federal student aid and research funding, and changes in health care regulation are likely to affect revenues from health care services for universities with medical centers.
The report’s release also coincides with a report also released Thursday by the Western Interstate Commission on Higher Education that projects a short-term decline nationwide in the number of college graduates and long-term declines in many Northeastern and Midwestern states, a finding that could increase the costly competition for students.
The Moody’s report notes that much of the enrollment declines reflect graduate program enrollment. Law schools and business schools, typically thought of as revenue-generators for many universities, have seen lower numbers of applications in recent years.
The report also notes that potential changes in federal aid policies, including those governing Pell Grants and subsidized loans, which could be a part of a deal Congress strikes to avert sequestration planned for March, could affect colleges’ bottom lines. “A disruption to this funding could have significant impact on enrollment levels and associated revenue from student charges, particularly for public universities, graduate programs, and lower-rated universities that are most reliant on federal funding,” the report states.
The report does note some potential ways to mitigate enrollment declines, including increased recruitment of out-of-state students and online classes. But those two strategies tend to be most effective for institutions with strong brand recognition, which are facing the fewest constraints.
The report does note that increasing retention of admitted students could benefit institutions, since it increases revenues without any increase in recruitment expenditures.