U.S. not-for-profit private colleges and universities rated by S&P Global Ratings continue to navigate a highly disruptive environment due to the COVID-19 pandemic, ongoing demographic shifts, and affordability concerns. In fall 2020, many colleges and universities transitioned their mode of instruction to a hybrid model, which generally affected campus operations and auxiliary revenues. Traditional recruitment approaches were also affected, with a significant reduction in campus tours and high school visits. Schools were forced to innovate and respond quickly. However, during fiscal 2021, meaningful emergency federal funding provided greater financial flexibility to navigate these ongoing risks. In 2021, while upgrades only marginally outpaced downgrades, we revised the rating outlook to stable from negative for a large number of private institutions.

Chart 1

Rating Distribution And Characteristics

S&P Global Ratings maintained 276 ratings on U.S. private colleges and universities as of June 15, 2022. Since our last published medians report, we have assigned issuer ratings to 17 new private colleges and universities.

Our analytical metrics, which align with our criteria, evaluate both the enterprise and financial profiles of institutions. In fiscal 2021, enterprise profiles generally remained stressed, while financial profiles generally improved due to expense reductions, emergency federal grants, and favorable investment returns. In terms of the enterprise profile, aside from the highest-rated issuers, selectivity generally weakened, reflecting a highly competitive environment.

The financial profiles of many colleges and universities demonstrated improvement and more favorable margins in fiscal 2021. Management teams reduced expenses through furloughs, layoffs, and early retirement plans. Many schools also reduced discretionary expenses and benefited from significant federal pandemic relief funding. Others also received state pandemic-related grants, while some smaller schools got Payroll Protection Plan loans. Although certain issuers made permanent expense reductions, others opted for temporary reductions to retirement benefits or athletics, which many schools later reinstated. Operating margins at certain colleges and universities could remain strong in fiscal 2022 due to remaining federal grants. However, we anticipate that operating margins in fiscal 2023 will likely be more consistent with historical trends, especially as schools face higher inflation and a competitive labor market.

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

• The sectorwide median change in full-time equivalent (FTE) enrollment declined for a second year.
• The median freshmen acceptance rate continued to weaken, primarily at lower-rated institutions.
• Operations and available resources showed strong improvement across rating categories.
• International FTE enrollment continued to decline in fall 2020.
• Debt levels remained relatively consistent in fiscal 2021, compared with the previous year, which had more sizable increases.

Table 1

The ratio analysis in this report is based on data as of June 15, 2022. The sample size for our private college and university median ratios for fiscal 2021 was 276 (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 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 (table 2) should not be considered thresholds to achieving a particular rating.

Table 2

Outlooks are increasingly stable

Since our last report, we have assigned 17 new ratings: five in the 'A' category and 12 in the 'BBB' category. We lowered five ratings between June 15, 2021, and June 15, 2022; each of the downgrades was one notch, and only one issuer moved to a speculative-grade rating from investment grade. All the upgrades remained within the same rating category, aside from one issuer that moved to 'BBB-', or investment-grade, from the speculative-grade level.

The most common rating for a private college or university was 'A-' (chart 2). Overall, we still see a normal rating distribution, with 71% of institutions rated in the 'A' and 'BBB' categories (chart 3). The outlook distribution shifted significantly: 80% of our ratings had a stable outlook as of June 15, 2022, which is an improvement from 69% as of June 15, 2021 (chart 4). Only 16% of our rating outlooks are currently negative, indicating that many institutions were able to successfully navigate the pandemic.

Chart 2

Chart 3

Chart 4

Enrollment And Demand Metrics

Enrollment trends show declines across all rating categories

FTE enrollment in fiscal 2021 declined across all rating categories. The 'AAA' rating category had the sharpest declines, particularly at selective liberal arts schools, which was partially due to an increase in deferrals. Many of these highly selective universities were among the first to announce a hybrid or remote approach, which affected enrollment. However, when looking at the longer-term trend, lower-rated issuers have been particularly stressed (chart 5).

Issuers in the 'BBB' and speculative-grade rating categories have had sharp enrollment declines over the past four years, while those in the 'A' category exhibited a variable enrollment trend. Aside from during fiscal 2021, FTE enrollment has increased at colleges and universities in the 'AAA' and 'AA' categories. At highly selective institutions, enrollment rebounded in fall 2021 and we continue to see steady growth in fall 2022. However, we anticipate continued enrollment pressure in the 'BBB' and speculative-grade categories.

Other demand metrics

The transition to test-optional admissions represented a significant shift in the recruiting process for private colleges and universities since most were not test-optional before the pandemic. Test-optional admissions tend to encourage students to apply to more selective institutions when otherwise they might think their test scores were a barrier to admission. Historically, when a college moved to test-optional admissions, average SAT scores reported generally went up, since students with stronger test scores will continue to submit, while applicants with weaker scores will generally exercise the choice not to submit their scores as part of their application. However, for our 2021 medians data, average SAT scores still declined, reflecting a highly competitive market and intense pressures for universities to stabilize enrollment. The highlight on the enterprise profile for most institutions was maintaining retention figures despite a highly disruptive environment.

Metrics such as selectivity, retention, the six-year graduation rate, and student quality tend to correlate significantly with credit quality. In fiscal 2021, both selectivity and student standardized test scores weakened. The median selectivity rate in fiscal 2021 was 71.1%, which weakened from 66% in fiscal 2020. In terms of SAT scores, the median in fiscal 2021 was 1192, which weakened from 1206, despite the the widespread increase in test-optional admissions. However, retention and graduation rates remained consistent. The median retention level in fiscal 2021 was 83%, which was comparable with 84% and 83%, respectively, in fiscal years 2020 and 2019. Similarly, graduation rates remained virtually unchanged in fiscal 2021 at 71.5%, compared with 71.4% in fiscal 2020. During the pandemic, management teams focused increasingly on connectivity and student support, which helped many universities maintain retention levels, and we anticipate this will continue.

For fall 2021, many colleges and universities returned to a normal mode of instruction, which was predominantly in-person classes. On the enterprise side, the disruption of the pandemic had some lingering effects during fiscal 2022. As prospective applicants navigate an increasingly uncertain landscape, it is possible they will continue to apply to a larger number of colleges, which would generally improve selectivity but negatively affect matriculation. Tuition discounting, which has been rising for several years at private colleges and universities, will be increasingly pressured as management teams work to improve yield rates. The shifts will likely be especially challenging for smaller institutions, particularly those with less selective demand profiles.

Chart 5

Financial Medians

Fewer on-campus students led to temporary shifts in revenue diversity

In fall 2020, many colleges and universities continued with a hybrid approach to instruction, characterized by an increase in virtual instruction. Although institutions varied in their approach, due to generally fewer on-campus students, auxiliary revenues declined in fiscal years 2020 and 2021 compared with fiscal 2019 (chart 6). At the same time, most institutions received one-time emergency federal funds through the CARES Act, Coronavirus Response and Relief Supplemental Appropriations Act, and the American Rescue Plan Act. Therefore, in fiscal 2021, for many schools, grants and contracts increased compared with fiscal 2020 (chart 7). The increase in federal grants was also a factor in auxiliary revenues representing a lower amount of total revenue for fiscal years 2020 and 2021.

Chart 6

Chart 7

Improved operating margins due to expense reductions and federal grants

Private colleges and universities had strong improvement in median operating performance in fiscal 2021 compared with fiscal 2020. Specifically, the median operating margin was 1.8% in fiscal 2021 compared with 0.3% in fiscal 2020; while the average operating margin improved to 2.6% compared with 0.7% in fiscal 2020. Due to pressures related to the pandemic, many universities implemented expenses reductions, which for certain schools included furloughs, layoffs, and other staff adjustments. Other institutions offered early retirement packages or achieved savings through attrition. Federal grants helped universities increase revenues while offsetting pandemic-related costs for testing, technology, and cleaning.

Although operating margins were more robust in fiscal 2021, we anticipate that they will likely return to historical levels after fiscal 2022. Many expense reductions instituted by universities were temporary; for example, many schools suspended or reduced retirement benefits and travel budgets but most subsequently reinstated them. We anticipate that due to a competitive labor market, salary expenses will continue to increase. Many colleges and universities had also suspended athletics and study-abroad programs during the pandemic, most of which were reinstated. In fiscal 2021, tuition discounting increased across all investment-grade rating categories (chart 8), which we anticipate will continue as schools compete for a smaller group of students.

Chart 8

Endowment improvement helps provide additional financial cushion

Endowment market values generated robust returns in 2021, which increased liquidity and balance-sheet strength. The endowment levels increased across all rating categories, with the highest rating categories having the strongest returns (table 3). In 2021, median endowment value increases were 40.7% for 'AAA', 33.1% for 'AA', 32.6% for 'A', 27% for 'BBB', and 26.4% for speculative-grade rating categories. The endowment investment gains helped provide increased stability for many issuers, including many that were in the 'BBB' category.

Table 3

Available resources improved, with robust growth at the highest rating categories

Balance-sheet metrics remain a key consideration in our analysis of credit strength. Expendable resources in fiscal 2021 had robust growth, which increased the financial cushion for many colleges and universities. Expendable resources to operations improved across rating categories, especially at the 'AAA' and 'AA' rating level (chart 9). We measure available resources for private colleges and universities through expendable resources, 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.

Chart 9

Debt levels remained generally consistent in fiscal 2021 (chart 10) year over year, except for at the highest rating category. In the investment-grade rating category, 'AAA' rated issuers had the most sizable increases, while debt for entities in the 'AA', 'A', and 'BBB' categories remained stable. Debt also increased for those in the 'speculative-grade' category (chart 11). However, expendable resources to debt outstanding improved across rating categories (chart 12).

Chart 10

Chart 11

Chart 12

Credit Quality By Enrollment Size

Most larger private colleges and universities that we rate tend to have greater diversity of revenue, which helps increase their financial flexibility. Although larger schools generally have stronger credit quality, the pandemic accentuated this trend. Due to disruptions in admissions, larger colleges, by virtue of their larger applicant pool, had more flexibility to navigate demand pressures. Most larger schools also have a broader alumni base for fundraising and healthier endowments.

We categorize smaller colleges as those with fewer than 1,400 FTE students, and larger institutions as those with more than 15,000 FTE students. As per our criteria, we apply a negative qualifier to those institutions with very small FTE enrollment due to their more limited program offerings and potential vulnerabilities to shifts in demand. Although these institutions are not precluded from higher ratings, there is a correlation between rating and enrollment size. In the 'AAA', 'AA', and 'A' rating categories, larger institutions with more than 15,000 FTE greatly outnumbered smaller institutions with fewer than 1,400 FTE (chart 13). While there are some smaller liberal arts schools in the 'AAA' category, none of these institutions has fewer than 1,400 FTE students. The resiliency in enrollment size is evident in that there are no 'BBB' rated issuers with more than 15,000 FTE and only one in the speculative-grade category, showing that larger institutions can frequently overcome credit risks.

Chart 13

When comparing universities by enrollment size, it is evident that the larger private universities generally tend to have stronger demand metrics. As shown in table 4, larger schools were more selective, and had stronger retention, more revenue diversity, and better operating margins. Lower institutional financial aid also allows larger universities more flexibility in a highly competitive market.

Table 4

What We're Watching

Fall 2022 enrollment

Due to a competitive admissions environment, we anticipate that prospective students will continue to apply to a larger number of colleges and universities, which may improve selectivity rates but could challenge yield. We anticipate that highly competitive colleges and universities will continue to leverage their early-decision programs, while others will continue to see pressure on their tuition discounting. Management teams will likely focus on broadening their geographical reach of prospective students, both domestically and internationally, to help stabilize enrollment.

Changing admissions policies

Many institutions dropped testing requirements during the pandemic. We anticipate more colleges and universities will permanently transition to test-optional admissions policies following trials, which could continue to spur increased applications. At less selective universities, an increase in applications might no longer be as strong an indicator that there will be improvement in matriculants. The shift to test-optional admissions will likely benefit universities that already have strong demand profiles, as it could encourage students to apply to more selective institutions when they otherwise might have felt their test scores were a barrier to admission.

Operations after relief funding

We expect many institutions will post solid operations in fiscal 2022, with support from remaining relief funds. Some colleges and universities will also continue to benefit from expense measures implemented during the pandemic that right-sized operations. However, we expect schools will face a tougher operating environment in fiscal 2023, particularly with a highly competitive labor market and inflation nearing a 40-year high. We also anticipate that universities will be increasingly focused on fundraising and alumni engagement.

Market volatility

S&P Global Economics' U.S. real-time economic trackers indicate that inflationary pressures and rising interest rates have softened economic activity. Private colleges and universities saw impressive growth in investments in fiscal 2021, but those large gains might not be sustained as institutions face a potential bear market.

Capital investments

Changes in total enrollment, shifts to virtual instruction, and remote work are causing institutions to revisit campus master plans. As interest rates and construction costs rise, colleges and universities could alter plans for campus improvements that attract students. In this environment, we expect higher-rated colleges and universities with deep pockets will continue to differentiate themselves and improve their demand profile, as we continue to see bifurcation of credit quality within the sector.

Innovations in programming

Many colleges and universities are also developing and revising curriculum options to respond to market needs, including programming in health sciences, nursing, and cybersecurity, which are in high demand. Universities are also increasing certificate programs and opportunities for adult learners, which is expanding their recruiting base and revenues.

Table 5

Table 6