NEW YORK (MainStreet) New York-based debt rating agency Moody's Investors Service has issued a negative outlook for the higher-education sector in the United States.
In a July 14 announcement distinct from a rating Moody's reports that higher education faces limited growth prospects over the next 12 to 18 months.
Higher ed is a sprawling and variegated enterprise. But it also happens to be tied to the bond market, from millions of people with student loans from private and government lenders to universities who have used their endowments to invest in fixed income. The total of U.S. student loan debt has probably gone by the $1.2 trillion mark. As a ballpark figure, that would be about 7% of the US Gross Domestic Product.
Moody's says positive trends like strong long-term demand for higher education and reduced household debt could help create conditions for colleges to stabilize over the next year. But Moody's cautions that the institutions will face continued financial pressures in the near term.
Some of Moody's conclusions seemed self-evident, such as the fact that "[t]here is a growing disparity between tuition independent colleges and market leading university's with diverse revenue streams," a gimme if enrollment declines.
Others are more worrisome. Despite the steep cost of college, growth in tuition remains essentially static. Moody's expects it to increase 3% to 4% and will be surpassed by the growth in expenses. One in ten public and private colleges is experiencing "acute financial distress" because of falling revenue and weak operating performance.
Competition for sponsored research funds is stiff and getting stiffer, which can have a bad impact on research produced at universities. The success rate for proposals went below 15% last year, down from 19% in 2008. It's not clear whether anyone has calculated the cost in both time and money spent involved in putting together an average research proposal that gets shot down.
There are positive predictions. Moody's notes that the Department of Education expects the number of master's degrees awarded to grow 20% while associate degrees will increase by 9%.
Higher ed is expected to benefit from a spike in donations linked to stock-market returns. But the report doesn't seem to handicap the lifespan of the current bull run. University endowments took a big hit during the financial crisis when an over-bought market experienced a brutal sell-off.
Moody's also warns on the cost of retiring staff, stating that "[p]ublic colleges will begin to feel the impact of underfunded pensions and health benefits for retirees." It says nothing about the derivative instruments credit default swaps and collateralized debt obligations linked to home mortgages that got investment grade ratings and were later downgraded to junk, but not before they found their way into university pension funds prior to 2008.
Written by John Sandman for MainStreet