Dive Brief:
- Moody’s Ratings anticipates another tough year ahead financially for U.S. colleges as the sector navigates enrollment pressures, rising expenses and political headwinds under the Trump administration.
- The ratings agency recently issued a negative outlook for the higher education sector for fiscal 2026 amid economic uncertainty and shrinking margins.
- “Federal policy and a shrinking population of high school graduates create an increasingly difficult and shifting operating environment for colleges and universities,” analysts said in a report last week.
Dive Insight:
Higher ed started the year with a stable outlook overall from Moody’s. That changed less than two months after President Donald Trump retook office, when the ratings agency downgraded its 2025 outlook to negative.
By then, the Trump administration had begun curtailing research funding, increasing investigations into colleges over antisemitism-related claims, cracking down on immigrants and international students, and supporting massive changes to higher ed policy like higher endowment taxes.
The political challenges have only intensified since then, with the summer passage of Republicans’ massive spending bill that contains major higher ed policy shifts. The administration has also moved to start dismantling the U.S. Department of Education, slow down the visa system, and impose ideological and operational changes on colleges.
In last week's report, Moody’s analysts highlighted changes to the student loan system as potentially the most painful.
Under the spending bill, the federal government next year will begin phasing out the Grad PLUS loan program, which helps graduate students finance their programs up to the cost of attendance. The government will also cap student borrowing at $100,000 for most graduate programs, with a $200,000 limit for professional programs such as medical school.
“Institutions with large master’s degree offerings will be particularly vulnerable to shifts in student demand if prospective students are not able to fully access the private loan market,” analysts said.
All of those disruptions come on top of economic trends already pressuring the sector. Moody’s highlighted demographic challenges as the national population of high school graduates is projected to decline beginning next year.
For colleges, that means a slowdown in revenue growth. Moody’s estimates 3.5% growth overall in revenue, down from 3.8% in 2025. For smaller colleges, the 2026 increases could be even smaller — 2.5% for small public institutions and 2.7% for small privates.
Expenses, on the other hand, will grow 4.4% by Moody’s estimates. While that represents more modest inflation compared to this year’s 5.2% increase, it’s still higher than revenue growth and will eat into institutions’ margins.
Moody’s forecast that the share of private colleges with negative earnings margins (before taxes, depreciation and amortization) will increase to 16% next year. That’s compared to an estimated 12.2% in 2025 and 7.2% in 2024.
“Given the strained revenue forecast, management’s ability to control costs and identify creative operational efficiencies will take on even greater importance even at the largest and wealthiest institutions,” analysts said.
Margin pressures could lead to more early retirement buyouts, workforce cuts, benefit reductions, shared services and mergers to “address fundamental business model weakness,” they added.
