Research

Moody's Upgrades Financial Outlook for Higher Ed

• By Dian Schaffhauser
• 03/30/21

The financial outlook for higher education isn't as grim as once believed. Investor analysis firm Moody's recently updated its outlook for the sector from "negative" to "stable." The reasons:

• More colleges are "pledging" to have students come back to campus in much larger numbers for fall 2021;
• Federal relief includes additional help for higher ed;
• State funding appears to be "steadier"; and
• Investment returns are stronger.

However, Moody's warned, not every school will benefit equally and some institutions will continue to feel financially squeezed due to "longer-term demographic changes and shifts in consumer preferences."

The return to campus means an uptick in tuition and auxiliary sources of revenue such as dining and parking, according to Moody's. While the return in international students will probably take longer, the report noted, due to greater international competition for these high-paying learners, "prospects are improving" as immigration policies ease in the United States and messaging about the importance of international students "becomes more positive."

The three phases of COVID relief funding — about $40 billion — will go a long way in stabilizing the sector, Moody's noted. At the same time, research funding will continue to "remain positive." In 2021, funding grew by 3 percent for the National Institutes of Health and by 2.5 percent for the National Science Foundation.

As state economies have recovered, the risk of big cuts to public institutions has decreased. Most states have "lifted" revenue forecasts for the current fiscal year and next year, "reflecting stronger collections than expected," the report stated.

Finally, the market is strong, Moody's asserted, which in turn supports philanthropy and endowments and will boost families' ability to pay tuition.

The sunny outlook is shadowed by a couple of clouds. One is the possibility of continuance or growth in the public health crisis. As the report pointed out, "A deterioration in macroeconomic conditions that threatens state funding and higher education affordability or a material decline in financial markets could cause a change back to negative." Another is the disruption to K–12 education, which could "pose longer-term difficulties for higher education if students are less prepared."

"The greater presence of students in housing and resumption of other auxiliary activities will fuel better revenue prospects from tuition and student fees heading into fall 2021," said Debra Roane, vice president and senior credit officer at Moody's, in a statement. "Students' ability to return to campus will improve as the vaccine rollout succeeds, which will reduce the public health crisis. Most states have also lifted their revenue forecasts for the current fiscal year 2021 and upcoming fiscal 2022, which supports a steadier outlook for higher education."

The higher education outlook, "Outlook revised to stable as prospects for revenue growth improve," is available online to Moody's registered subscribers.