Private higher education institutions in the U.S. have operated in a challenging environment for the past few years because of demographic pressures, affordability concerns among students, and uncertain immigration conditions for international students. As with many other demand-driven industries, higher education was anything but immune to the negative effects of the COVID-19 pandemic. S&P Global Ratings' fiscal 2020 medians ratios for the sector reflect these pressures, in addition to a continuation of the trends that existed before the pandemic. Campus closures in spring 2020 hurt financial performance, with varying degrees of expense management and revenue replacement seen across institutions. Although we expect that the repercussions of the pandemic will be spread across several fiscal years for most institutions, our fiscal 2020 analysis indicates the initial impact was primarily spurred by the campus closures in March 2020.

While the pandemic presented additional challenges over the past year, the higher education industry continues to face pressures that existed even before this period. Although the entire industry is confronting rising demand pressures, highly regarded colleges and universities have been relatively resilient due to the continued global demand for their program offerings. On the financial front, our median metrics indicate the significant increase in debt issuances in the market in fiscal 2020, due to liquidity needs during the pandemic and low interest rates. Overall, our rating distribution remains fairly consistent with that in previous years, although the outlook distribution illustrates the looming pressures these schools face.

Chart 1

Rating Distribution And Characteristics

S&P Global Ratings maintained 293 debt ratings on U.S. private colleges and universities as of June 15, 2021. Since our last published medians report, we have assigned ratings to eight new issuers.

Our analytical metrics broadly fall into two categories, consistent with our criteria: enterprise and financial. As the effects of the pandemic started to become clear at U.S. private higher education institutions in March 2020, most enterprise metrics that were determined at the start of the academic year in fall 2019 remained intact. However, the pandemic's effects on financial metrics at most institutions became apparent in fiscal 2020 in the form of room and board refunds, increased costs associated with the unexpected transition to hybrid instruction, and lost revenues associated with campus closures. Our sectorwide median ratios for fiscal 2020 (table 1) display this anomaly: Enrollment metrics remained fairly stable or continued to reflect previous sector trends, but we noted a shift in several financial metrics. We anticipate a more pronounced disruption from previous industry trends in fiscal 2021 metrics as the enrollment pressures observed in fall 2020 filter through into the ratios.

In our assessment of the medians (tables 1 and 2), we observed the following:

• The sectorwide median percentage change in full-time equivalent (FTE) enrollment turned negative for the first time in four years, largely spurred by schools in the speculative-grade, 'BBB', and 'A' rating categories.
• The median freshman acceptance rate continued to weaken, primarily at lower-rated institutions.
• The pandemic affected operating performance to varying degrees across our rated institutions with little correlation to the rating levels. Revenue diversity shifted from auxiliary revenues to grants and contracts revenues as federal relief funds covered part of the room and board refunds.
• Debt levels increased, especially at the 'AAA', 'AA', and 'A' rating levels, owing to low interest rates and the greater market access available to these institutions.
• Available resource ratios remain consistent with the levels in the past few years, with the exception of some weakening at the higher end of the rating spectrum due to increased debt.

Table 1

The ratio analysis in this report is based on data as of June 7, 2021. The sample size for our private college and university median ratios for fiscal 2020 was 265 (table 1). Consistent with previous years, we do not include universities and colleges that we consider specialty schools in our ratio calculations. Given the niche focus of these institutions (such as medical schools, stand-alone law schools, or arts schools), certain metrics used to measure credit quality might be skewed and would not be directly comparable with those of similarly rated institutions with a wider array of program offerings. Our calculations of financial metrics also exclude one institution that had not posted its fiscal 2020 audit as of June 7, 2021.

Our analysis of any particular institution involves a holistic view of its creditworthiness, which includes a qualitative assessment that is not captured in this article. The mean or median metrics reported in table 2 should not be considered thresholds to achieving a particular rating.

Table 2

Rating distribution: Outlooks indicate the potential for negative actions

Since our last report, we have assigned eight new ratings; two were in the 'A' category, five were in the 'BBB' category, and one was in the speculative-grade rating category. We lowered 18 ratings between Oct. 15, 2020 and June 15, 2021; one moved from the 'AA' category to the 'A' category, four moved from 'A' to 'BBB', and two from 'BBB' to speculative-grade. Of the three upgrades during this period, only one was a rating category change, from speculative-grade to the 'BBB' level. All other negative and positive rating changes were within the previous rating category. Consistent with S&P Global Ratings' expectations as stated in the 2021 sector view (for more information, see "Outlook For Global Not-For-Profit Higher Education: Empty Chairs At Empty Tables," published Jan. 20, 2021, on RatingsDirect), negative rating actions continue to significantly outpace positive actions this year.

Overall, we still see a normal rating distribution, with 68% of all institutions rated in the 'A' and 'BBB' categories. The outlook distribution shifted significantly: 87% of our ratings had a stable outlook as of May 1, 2019, compared with 60% as of Oct. 15, 2020, and 69% as of June 15, 2021. A substantial 30% of ratings have a negative outlook, reflecting continued risks associated with the pandemic. While most institutions are expecting to return to some form of normalcy in fall 2021, the financial repercussions of the pandemic will likely continue to be felt in the near term, especially in fiscal 2021 results. In line with our last median report, a low 1% of our ratings (on four universities) have a positive outlook, limited to institutions that have positive rating momentum even after tackling the pressures of the pandemic successfully.

Chart 2

Chart 3

Chart 4

Enterprise Metrics

Enrollment trends show the widening gap within the sector

The sector-level trend in FTE enrollment has remained relatively flat in recent years (table 1). However, the story varies widely across the rating spectrum, with consistently positive changes in FTE enrollment at the 'AAA' and 'AA' levels, and consistently negative changes in FTE enrollment at the 'BBB' and speculative-grade levels (chart 5). This differentiation continues to show that institutions with a solid market position, and usually with low acceptance rates and exceptional student quality, note continued demand despite high competition for a shrinking college-age population in several parts of the country, among other pressures. Part of this insulation from industry pressures is due to the diverse student draw at these institutions, including out-of-state and international enrollment, as well as a higher proportion of graduate and professional enrollment. However, even at the undergraduate level, colleges and universities with solid acceptance rates were able to maintain student quality and demand through their brand reputation.

Schools at the lower end of the rating scale felt the effects of the wider industry pressures acutely, as a significant proportion of our rated institutions continued to see declines in FTE enrollment. To combat these pressures, institutions implemented new recruitment and retention strategies, introducing new graduate, professional, and certificate programs based on market demand, offering hybrid or online programs (a transition that was bolstered by the pandemic in the 2020-2021 academic year), attempting to diversify the geographic draw of students, and consistently increasing financial aid. As a result of these efforts to diversify into graduate and professional programming, as well as the general decline in undergraduate enrollment, the median percentage of undergraduate students has gradually decreased over time for each rating category. We expect this trend will continue, albeit slowly, in the near term.

Chart 5

Other demand metrics remain relatively stable

In our view, metrics such as the freshman acceptance rate, retention rate, six-year graduation rate, and student quality correlate significantly with credit quality. This is reflected in the trend of the average metrics by category (table 2). Sectorwide, the median freshman acceptance rate has gradually weakened year over year since fiscal 2017. However, within rating categories, the trend in acceptance rates mirrored the trend in the change in FTE enrollment, as the higher rating categories ('AAA' and 'AA') saw improvements in median acceptance rates whereas the lower end of the rating spectrum ('BBB' and speculative-grade) continued to accept a greater number of students to combat demand pressures. Other metrics, such as retention and graduation rates, remained steady as institutions devoted substantial resources toward advising, guiding, and retaining students. Student quality metrics generally remained steady or improved in recent years, partially mirroring the trend in the national average SAT or ACT scores and the changing testing requirements at several higher education institutions. Overall, the stability in most demand metrics was a result of the increased investment by institutions to ensure student success and better justify the costs associated with college education. The trend also reflects the relative stickiness of these metrics, as any strategic efforts to improve them often take several years to translate into results.

Financial Metrics

Shifts in revenue diversity

Due to the campus closures in spring 2020, most private college and universities issued room and board refunds and lost other auxiliary revenues such as parking and dining fees. Schools with a high proportion of residential students were especially affected by the closures. As a result, the median revenue dependence on auxiliary items in fiscal 2020 notably declined for each rating category (chart 6). These declines were partially offset by funds from the federal government's Coronavirus Aid, Relief, and Economic Security (CARES) Act. While there was some differentiation in the timing and form of recognition of these funds, most institutions recognized them in fiscal 2020 under grants and contracts. As a result, we noted an increase in the median revenue dependence on grants and contracts across all rating categories (chart 7). We expect grants and contracts revenues will remain inflated to compensate for losses in other revenue items in fiscal 2021 and potentially in fiscal 2022 as institutions recognize the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) and the American Rescue Plan Act (ARPA) funds.

Chart 6

Chart 7

Operating margins and the effects of mounting tuition discounting

Overall, since operational pressures associated with the pandemic became apparent toward the end of fiscal 2020, sector-wide median net operating results declined only marginally to 0.3% in fiscal 2020 from 0.9% in fiscal 2019. Operating margins shrank across rating categories, as the negative effects of the campus closures were not directly correlated with credit strength, but with factors such as reliance on auxiliary revenues (for example, the proportion of residential versus commuting students) and expense management flexibility, among other things. We expect margins will remain stressed in the near term, with wider variation within the industry depending on factors such as the mode of instruction in the 2020-2021 academic year, enrollment, effectiveness of budget control measures, recognition of federal relief funds, and fundraising success during the pandemic.

With growing concerns around college affordability as well as the high competition for a shrinking pool of students, financial aid remains a key factor for colleges and universities trying to attract students. We assess institutional financial aid spending through the tuition discount rate, calculated as financial aid as a percentage of gross tuition and fees. With the exception of a slight decline in the median for the speculative-grade category and the 'BBB' category in 2019, the median tuition discount rate has continued to increase in the past four years for each rating category (chart 8) as well as for the sector as a whole (table 1). High tuition discount rates at the higher end of the rating spectrum are often offset by exceptional fundraising and healthy endowments, with several institutions in this category maintaining need-blind admission policies. We view the discount rates at similar percentage levels at lower-rated institutions to be a greater risk because these schools have less financial flexibility to accommodate for the increasing discounting needs, leading to weaker net operating results. As the industry grapples with changing demographics and intense competition, we expect this trend of increasing tuition discount rates will continue in the near term.

Chart 8

Endowment funds continue to provide financial cushion

Despite some volatility in markets in spring 2020, positive returns continued to drive increases in the average endowment market values in fiscal 2020 for all rating categories except for a small decrease at the 'A' rating level. Although the sectorwide endowment per FTE decreased marginally in fiscal 2020, category medians for this metric increased across the board. The muted growth in endowment values (table 3) compared with the past few years was spurred by lower financial market results as well as a weaker fundraising year. A study by the National Association of College and University Business Officers (NACUBO) reported a 16% decline in new gifting in fiscal 2020 compared with the previous year. The NACUBO study covered 705 public and private U.S. colleges and universities, whereas our review includes 265 private institutions.

Table 3

Available resources are relatively steady despite increasing debt metrics

Despite the challenging landscape for higher education institutions, the relative stability of the sector is most notably reflected in the median available resource ratios. We measure available resources for private colleges and universities through expendable resources (ER), calculated as a sum of net assets without donor restrictions, temporarily restricted net assets, less the plant, property, and equipment net of total debt. Since the changes in Financial Accounting Standards Board reporting standards for the classification of net assets, we determine the amount of temporarily restricted net assets for each institution based on the notes to the audited financial statements, or from information provided by the management team. We anticipate that all institutions we rate will be able to continue to provide this information. Our assessment of an institution's balance-sheet strength is based on the available resources as well as the cash and investments position.

While there have been some year-over-year fluctuations in available resources relative to operations (chart 9), the most notable have been due to changes in the sample of issuers in the 'AAA' and 'AA' categories in 2019 as well as the healthy market returns experienced in the year. Fundraising and endowment returns continue to insulate colleges and universities from some of the recent demand and operational pressures. Balance-sheet metrics are, therefore, a key consideration in our analysis of the credit strength and resilience of an institution, especially through the past year during the pandemic.

Chart 9

For higher education issuers, debt market activity increased in fiscal 2020 due to the continued low cost of borrowing. Pre-pandemic, colleges and universities took this as an opportunity to address capital needs and refinance existing debt; in the spring, we saw issuers accessing the markets with the primary aim of increasing liquidity during the pandemic. The increase in new-money issuances was apparent in our debt metrics for the year. The median debt per FTE enrollment rose for every rating category in fiscal 2020 compared with the previous year, ranging from 7% to 14% (chart 10), while the sector-wide median increased 9%. However, the growth in median debt outstanding was much more pronounced in the 'AAA', 'AA', and 'A' categories, increasing by 18%, 21%, and 14%, respectively, from the 2019 medians, compared with much smaller increases in debt levels at the 'BBB' and speculative-grade rating categories (chart 11). The difference between the notional debt amount and the debt per FTE enrollment for lower rating categories is due to the heightened enrollment pressures at these institutions. While the median ER relative to debt fell for each rating category in 2020 (chart 12), these reduced rates remain relatively in line with the historical levels before 2019 for each rating level. In our opinion, this reflects the fact that the increased debt levels at higher-rated institutions are still sufficiently absorbed by the balance sheets of most institutions.

The trend in debt burdens was an exception compared with the other debt metrics, as the median maximum annual debt service (MADS) burden showed minimal fluctuations for each rating category compared with the previous year. This indicates the benefits that institutions reaped from low interest rates, including several refinancing opportunities. Given that interest rates stayed low for fiscal 2021 as well, we expect that the growth in certain debt metrics will likely continue.

Chart 10

Chart 11

Chart 12

Credit Quality By Enrollment Size

Although challenges such as demographic changes, the growing debate around the value proposition of college education compared with its rising cost, dwindling international enrollment, and mounting financial aid pressures affect most institutions in the higher education sector, they are especially severe for smaller colleges and universities (those with fewer than 1,400 FTE students). On the other hand, larger institutions (with more than 15,000 FTE students) are more resilient to these challenges. Per our methodology for not-for-profit public and private colleges and universities, we apply a negative qualifier to those issuers with very small FTE enrollment due to limited program offerings and vulnerabilities to shifts in demand. While these institutions are not precluded from achieving a high rating, the rating distribution skews negatively compared with the rest of the sector, with the bulk of institutions (47%) rated in the 'BBB' category (chart 13). Conversely, a high 54% of large institutions are rated in the 'AAA' or 'AA' categories.

Chart 13

In addition to a notably different rating distribution, colleges and universities with a small student body also tend to have some weaker ratios (table 4), especially with regard to demand metrics and financial flexibility. These institutions have a higher proportion of undergraduate students as a percentage of total enrollment, signifying higher-than-average susceptibility to demographic challenges and limited ability to tackle the intense competition among undergraduate institutions. This further translates into higher tuition discount rates, given the smaller full-paying graduate student population. Due to the higher risk levels associated with potential enrollment fluctuations, small colleges and universities often maintain a relatively high balance sheet cushion. While these resources ratios lend financial strength to these institutions, we do not believe that the potential enrollment pressures, especially at the undergraduate level, expected in the next several years are completely offset by the balance-sheet cushion.

Large schools with more than 15,000 FTE students tend to have stronger-than-average program diversity, with a much lower proportion of students enrolled at the undergraduate level (table 4). As a result of their low acceptance rates and broad geographic draw, these institutions show resilience in their operating performance and their ability to withstand demographic changes. They often also maintain high levels of research and fundraise widely, which provides additional financial flexibility. As the stronger credit profile translates into a higher risk appetite and access to the debt market, the debt per FTE levels at large institutions tend to be considerably higher than the sector medians.

Consistent with the methodology in the rest of this report, while the information on the rating distribution in chart 13 includes specialty schools, the ratio calculations in table 4 exclude several small schools that are classified in this category. There are no schools with a large student body that are categorized as a specialty school.

Table 4

Looking Ahead

Given the timing of the onset of the pandemic, fiscal 2020 results only reflected the pressures associated with the first few months following the campus closures. Unlike the divided enrollment trends between rating categories in fall 2019, enrollment levels dropped for every rating category in fall 2020, with the 'AAA' category showing a steep 8% average FTE decrease. While the declines in the other rating categories were not as significant, the enrollment and demand repercussions were felt across the board (see "'Back to School' Will Take On New Meaning This Fall," May 27, 2021). In terms of the effect this had on financial operations, we expect to see weaker student-derived revenues in fiscal 2021 financial results, partially or fully offset by federal stimulus funding. However, there will be a discrepancy in the recognition of the CRRSAA and ARPA funds in fiscal years 2021 and 2022 as management teams determine when these relief funds will be best used for the institutions' specific operational needs. In our view, the varied success of private colleges and universities in addressing ongoing industry challenges and the pandemic will likely continue to widen the gap between the richest institutions and the smaller, regional private institutions with pre-existing financial stress.

Table 5

Table 6