Rough seas ahead for higher education

March 8, 2013

While student borrowing for college has expanded to record levels and 12 percent of student loans are delinquent, enrollment in U.S. public and private universities declined in 2012. The number of full-time students stood at 11.5 million last year, a 0.7 percent decline from 2011. Meanwhile, state and federal governments have been reducing funding to public universities. Schools themselves have increased their borrowing for capital improvements to compete for the best students. There are rough seas ahead for education; lower the sail and batten the hatches.

Moody’s Managing Director, John Nelson, explained in a recent report why Moody’s has switched to a negative view of the entire higher education sector. It is mainly a lack of preparation for the economic and institutional changes:

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. As the economic growth languishes below previous benchmarks and the federal government seeks to reduce spending in key areas, even market leading universities with diversified revenues are facing diminished prospects for revenue growth. Universities have been restraining costs in response to the weak economic conditions since the 2008-09 financial crisis, but they have only recently begun examining the cost structure of their traditional business model.

Here is more from Moody’s report:

In addition to recent tax code changes, the resolution of the federal fiscal deficit will likely involve flat to diminished research funding, cuts to Medicare and Medicaid as well as possible changes to federal student aid programs such as Pell Grants – all of which would impact important revenue streams for higher education.

And it gets worse:

Continued federal budget negotiations may result in further pressure on colleges because a rising share of students are dependent on federal grant and loan programs, both of which may be curtailed to some degree. According to The College Board, the number of Stafford loan recipients has grown by 95 percent over the last 10 years to 10.4 million students in 2011-2012.

And how does the future look?

All but the most elite universities face diminished student demand and increased price sensitivity due to a prolonged period of depressed family income, household net worth, and a dip in the number of domestic high school graduates since the peak of 3.34 million for school year 2007-2008.

How will higher education manage through these rough seas? John Nelson, Moody’s managing director, explained in an email that he expects schools to attract more out of state students (at higher tuition rates) and beefing up facilities:

The first, and most important, form of diversification for most public universities is attracting more students from out of state, and to diversify among out of state students to new states and countries.

For most public universities, especially those in small and medium sized states, the percentage of non-resident students has steadily increased over the past two decades.  The percentage from California and other western states has increased.  And the percentage from foreign countries, especially China, has increased significantly.

Also, more public universities have invested in student residences and student recreation/athletic facilities. These all generate more student fees and net revenue than would be available from a more local commuter student population and are a form of diversification that amplifies the trend of attracting more non-resident students.

In terms of academic offerings, many public universities have diversified their curriculums by adding both honors colleges as well as more transfer capacity for students coming from community colleges. There has been a shift toward more career-oriented curricula as well—more business, more computer science/IT, more allied health—these are also a form of diversification.

Lastly, a few universities have engaged more actively in consulting services with corporations on various matters, which can be a significant source of revenue for some.

In contrast to Nelson’s view, the State Higher Education Executive Officers said in a press release that schools shouldn’t hunt for out-of-state or international students, but rather should get down to the basic work of improving their educational offerings:

Avoiding bad judgments can be difficult when facing tough choices. Institutions may cut too many quality corners or compete with each other to raise revenues from “new” sources (such as out-of-state or international students) rather than make difficult decisions about priorities or the extra effort to create and effectively implement innovative practices.

Policymakers may overestimate how many students can be well-educated with existing resources or make unrealistic assumptions about the potential for technology and new delivery methods to rapidly become a panacea offsetting the long-term negative effects of budget cuts or tuition increases on access to higher education and the quality of our workforce.

Students with large outstanding loan balances are not the only ones facing pressure. The higher education institutions themselves are facing some very troubling times. It is indeed rough seas ahead for higher education.

Further: SHEEO: Tables and Charts from SHEF FY 2012 Final Report

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