Moody’s: U.S. higher education outlook remains mixed in 2012
Global Credit Research – 23 Jan 2012
New York, January 23, 2012 — For 2012, Moody’s Investors Service retains the mixed sector outlook for U.S. not-for-profit private and public colleges and universities that was established last year. The rating agency expects slower revenue growth, greater student resistance to tuition increases, and heightened public scrutiny requiring universities to operate more efficiently and to keep costs down.
Moody’s has a stable outlook for the diversified market-leading colleges and universities with strong market positions and balance sheets and multiple revenue-generating business lines. A negative outlook is in place for the bulk of rated colleges and universities, which are far more dependent on state appropriations, student tuition, or both.
“The market leaders are typically rated in the Aaa and Aa categories, though not exclusively, and represent a minority (about one third) of our rated higher education portfolio,” said Kim Tuby, author of the report. “The majority segment with a negative outlook attracts students more regionally, retains less pricing power, and maintains thinner balance sheets.”
During the past year, Tuby said, public and political scrutiny of colleges and universities, both not-for-profit and for-profit, have escalated and that “the sector will remain under the microscope in 2012 and beyond.”
Prospective students and their families are increasingly price-sensitive, discerning consumers, and donors, research-granting organizations, and state governments have more limited resources to invest in higher education, according to Moody’s.
“Colleges and universities are under rising pressure to improve disclosure and limit tuition increases,” said Tuby. “They must work harder to distinguish themselves and clearly articulate their unique product values in a more competitive environment.”
Despite stiffer headwinds, the Moody’s report concludes, the large majority of rated colleges and universities have fared well since the start of the 2008-09 financial crisis, demonstrating organizational nimbleness during a prolonged period of economic stress.
The report, “U.S. Higher Education Outlook Mixed in 2012,” is available at moodys.com.

Outlook for Higher Education Remains Mixed, Moody’s Says
By Scott Carlson, The Chronicle of Higher Education, January 23, 2012
In a report released on Monday, Moody’s Investors Service sticks with the mixed outlook for higher education that it established last year: For leading colleges that are well managed and diversified, the market is looking stable. For the rest, not so much.
The outlook report, which is released annually at the beginning of the year, says that a majority of colleges—those dependent on tuition or state money—will continue to face challenges in the next 12 to 18 months. Those challenges will, in part, stem from the public’s scrutiny of rising tuition and from pressures to keep it down. Analysts at the credit-rating agency also expect demand to rise for admission to the largest and highest-rated institutions, while other colleges may struggle to attract students.
The Occupy protests and other events have put intense focus on college tuition. “Tuition levels are at a tipping point, and the cost of college will be a critical credit factor for universities to manage long-term,” the report says. “We expect that the pace of future net tuition revenue growth, both on a total and a per-student basis, will be much lower than the strong growth experienced over the past 10 years.”
A declining yield in admissions is troubling trend, the report notes. Many colleges may appear more selective, but only because more students are applying to more colleges. “Median freshman yield rates (percentage of accepted freshmen who chose to enroll) at both private and public universities have steadily declined over the past five years, highlighting increased competition,” the report says. “The trend of declining yield is particularly notable for the lower-rated private colleges, which are increasingly competing with lower-cost public colleges and feeling the most pressure to slow tuition increases and offer more tuition discounting.”
Demand for some graduate and professional programs, particularly in business and law, is also softening—perhaps because the public doubts the payoffs those programs promise. “Historically, demand for these types of programs was countercyclical with the economy,” the report says, adding that enrollment in graduate programs dropped in 2010. “We have anecdotally heard that recruitment for top students to these types of professional programs is fierce, with law and business schools increasingly using strategic financial-aid offerings to attract top talent and secure entering class sizes,” the report says.
The Moody’s report addresses a key question: Is the higher-education model fundamentally broken? Moody’s analysts maintain that the business model is “generally sound and long-lasting,” but that higher education will have to innovate in a number of ways to remain viable. Such innovations might include collaborations between colleges, more centralized management, more efficient use of facilities, a reduction in the number of tenured faculty members, and the geographic and demographic expansion of course offerings.