- Colleges face their highest expense growth in over a decade as rising costs combine with wage inflation, labor shortages and a push to hire, according to two new reports issued this week by Moody's Investors Service.
- At the same time, volatility has returned to the investment market, and recent public funding increases are waning, Moody's said. Colleges also face mounting enrollment uncertainty that raises risks for tuition-dependent institutions that lack a national brand and deep pockets.
- Most of the U.S. higher education sector will remain financially stable in the near term thanks to strong endowment values and liquidity levels that grew recently, the reports said. But Moody's analysts expect the converging pressures to squeeze many colleges' budgets in fiscal 2023 and beyond.
Bond ratings agencies' periodic reports can offer insight and perspective on the higher ed market's financial performance and underlying characteristics. Moody's rates institutions that tend to be stronger financially than the U.S. higher ed sector as a whole, but it still tracks a range of factors affecting colleges of all sizes and types.
Its analysts expect colleges to experience median annual expense growth of 4% to 6% for the second straight year, driven by labor costs. That's substantially greater than the typical increase over the last 10 years, which was 3% to 4%.
The tight labor market doesn't merely drive up colleges' costs. It contributes to enrollment uncertainty and, by extension, to unclear revenue prospects. That's because rising wages and a low unemployment rate can convince high school graduates and those who might go back to college to instead seek work.
Community colleges in particular are exposed to this dynamic, although graduate programs could also see enrollment slow if the labor market remains good for job seekers, Moody's found. Community colleges already bore the brunt of pandemic-era enrollment declines.
At the same time, inflation hits low-income households — and the students who come from them — hardest. Higher prices for necessary expenses like food and transportation mean less discretionary income to spend on priorities like tuition, Moody's noted.
Signs indicate declines will continue at some of the same public and private colleges that already saw years of enrollment decreases, according to Moody's.
On the other hand, institutions that rely less on tuition revenue to make their budgets are less susceptible to the converging pressures. They typically have more gift and endowment revenue to route toward financial aid, particularly after strong stock returns in 2021.
Application numbers provide one data point that could go against the grain of this larger narrative. Common App reported a 21.3% increase in applications over 2019-20 as of March 15, including strong growth in applications from underrepresented student groups. Nonetheless, the provider's applications overall skew toward affluent students, and individual students could simply be applying to more institutions, Moody's analysts wrote.
Students applying to more colleges can be a stressor on the sector because it makes enrollment yields more difficult to predict and throws financial aid models into question.
Federal coronavirus relief totaling about $77 billion for institutions and students buoyed colleges through many of the pandemic's financial twists and turns. But many institutions are recognizing the last of that aid in fiscal 2022, Moody's found. And many colleges have spent the bulk of the aid they recognized.
"With the pandemic relief funding drying up, some institutions will be left with multiyear structural budget deficits that will potentially result in weaker credit quality," analysts wrote.
Looking forward, funding growth from states seems unlikely to match cost increases for higher ed seen in the current fiscal year, which Moody's found were the largest in more than a decade.
Boosting colleges' prospects is a recently enacted federal spending bill that raises the maximum Pell Grant award by $400 to $6,895 and also hikes the federal funding available for research by 5%. Additionally, it increases funding for historically Black colleges and universities and minority-serving institutions by 12%, to $885 million.
Macroeconomic factors that could change Moody's outlook include any slowdown in employment or wage growth, which could spark greater enrollment at community colleges and institutions serving lower-income students.