Moody’s: Outlook for higher ed sector now negative

Moody’s Investors Service on downgraded its outlook for the higher education sector to negative across the board, saying even prestigious, top-tier research universities are now under threat from declining enrollment, government spending cuts and even growing public doubts over the value of a college degree.

Previously, its outlook had been stable for those better-positioned institutions, and negative for the rest.

The report explaining the decision outlines a range of financial challenges now burdening virtually all institutions, though in different measures in different places — stagnant family income that limits pricing power, substantial state funding cuts, a demographic dip in the population of new high school graduates and a federal budget standoff that almost certainly bodes ill for the future flow of dollars for research and student-aid programs like Pell Grants.

And despite the obvious pressure, Moody’s says too many college leaders still haven’t made the tough choices required to survive and thrive.

“The new sector-wide negative outlook reflects mounting pressure on all key university revenue sources, requiring bolder actions by university leaders to reduce costs and increase operating efficiency,” it said.

The report speaks to a painful reality in the field: While institutions continue to raise tuition at far above the rate of inflation, angering parents and politicians, most are in fact struggling to collect much more tuition revenue.

While colleges raise their list prices and collect more from those who can afford to pay, most simply cannot fill seats without offering substantial discounts. The report cites federal data showing the average American family’s net worth declined 39 percent in the three years ending in 2010, dropping to its lowest level since 1992. Increasingly, price is a factor for families.

A separate survey of about 300 colleges released last week by Moody’s found about one-third were expecting tuition revenue this year either to decline or fail to keep pace with inflation. A few years ago, virtually all colleges were seeing tuition revenue rise.

Enrollment fell this fall in about half of colleges, and there have been sharp drop-offs in graduate business and law programs, which traditionally have been key revenue sources for many institutions.

Much of higher education has always operated on the financial edge, and with endowments recovering, times now may well be better than at the height of the recent recession. (Moody’s also gave the entire higher ed sector a negative outlook in 2009-2010, returning to a stable outlook for top-tier universities the next year.) But lately there have also been growing challenges involving the public’s perception of the value of college.

In particular, the report notes “alarm over a potential student loan bubble and diminishing affordability of higher education has reached a fevered pitch over the last two years.” While acknowledging postsecondary education “remains a valuable long-term investment,” the report argues burgeoning student loan debt and seemingly endless tuition increases are raising public doubts.