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Moody's Downgrades Higher Education's Outlook

December 6, 2017
 
 

Citing uncertainty over federal policies as a contributing factor, Moody's on Tuesday downgraded its financial outlook for higher education to negative from stable. The credit ratings agency predicted that the growth of the industry's expenses will outpace revenue growth for the next 12-18 months, with public universities in particular facing money woes.

Increases of tuition revenue, research funding and state contributions will "remain subdued," Moody's said. And, over all, the sector's expenses will rise by 4 percent, according to Moody's. But less than 20 percent of public, four-year institutions will see their revenue increase by more than 3 percent. More than half of private institutions will achieve growth of at least 3 percent.

Cuts to federal financial aid programs or even funding growth that fails to keep up with inflation would exacerbate higher education's problems, Moody's said. Likewise, the report said the GOP's tax bills could hurt colleges' private fund-raising, increase borrowing costs for private activity bonds and depress graduate student enrollment. And federal immigration policies could decrease international student enrollment, the ratings agency said.Exhibit 2. Expected growth rates vary by revenue streams. Moody’s forecasts growth assumptions for each revenue source in FY 2018 and 2019: net tuition and auxiliaries: 2-3.5 percent; state appropriations: 2-2.5 percent; patient care: 5-7 percent; grants and contracts: 1-2 percent; endowment income: 2-5 percent; gifts for operations: 6-6.5 percent; and other revenue: 6-6.5 percent. At private universities, sources of aggregate revenue are broken down as follows: net tuition and auxiliaries: 35 percent; state appropriations: 0 percent; patient care: 27 percent; grants and contracts: 14 percent; endowment income: 13 percent; gifts for operations: 3 percent; and other revenue: 8 percent. Median private university revenue breakdown: net tuition and auxiliaries: 74 percent; state appropriations: 0 percent; patient care: 0 percent; grants and contracts: 2 percent; endowment income: 9 percent; gifts for operations: 6 percent; and other revenue: 3 percent. At public universities, sources of aggregate revenue are broken down as follows: net tuition and auxiliaries: 33 percent; state appropriations: 19 percent; patient care: 19 percent; grants and contracts: 16 percent; endowment income: 4 percent; gifts for operations: 3 percent; and other revenue: 6 percent. Median private university revenue breakdown: net tuition and auxiliaries: 50 percent; state appropriations: 24 percent; patient care: 0 percent; grants and contracts: 10 percent; endowment income: 2 percent; gifts for operations: 2 percent; and other revenue: 4 percent. Median data is the median for each revenue stream and will not add up to 100 percent. Median data may be zero in some cases, meaning that the median data point indicated no revenue from that particular revenue source. Aggregate data is driven by the largest universities in the portfolio, whereas median data adjusts for the diversity across the sector. Source: Moody’s Investors Service

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