As COVID-19 risks have subsided, most U.S. not-for-profit private higher education institutions across rating categories returned to pre-pandemic operations in fiscal 2022. However, because of persistent demographic shifts and students' affordability concerns, enrollment continues to decline in most rating categories. Higher Education Emergency Relief Funds (HEERF) have generally offset both one-time expenses associated with the return to pre-pandemic operations and the ongoing enrollment pressure, resulting in positive median operating performance across most rating categories, despite these challenges. While market volatility in fiscal 2022 reduced financial resources across the sector, median levels of cash and investments remain elevated compared with pre-pandemic levels. Finally, higher total adjusted operating expenses and the increase in the median total debt outstanding notwithstanding, balance-sheet ratios are stronger than they were before the pandemic.

Chart 1

Full details of the medians are available through our interactive dashboard, by clicking here: https://www.spglobal.com/ratings/en/research-insights/sector-intelligence/interactives/us-pf-highereducation-median-2023. The below image is a preview.

Rating Distribution And Characteristics

S&P Global Ratings maintained 273 debt ratings on U.S. not-for-profit private colleges and universities as of June 1, 2023. Since our last published medians report on July 12, 2022, we have assigned ratings to four new private institutions. On April 24, 2023, S&P Global Ratings released revised criteria for the higher education sector (see "Global Not-For-Profit Education Providers"). In accordance with our criteria, our analytical metrics evaluate both the enterprise and financial risk profiles. Many institutions' overall demand profiles were pressured during the pandemic, but we believe most of these pandemic-related concerns have subsided. As a result, median full-time-equivalent (FTE) enrollment rose modestly in fiscal 2022 (fall 2021) from fiscal 2021 (fall 2020) but remains below pre-pandemic levels; the highest rating categories saw the most improvement. Furthermore, illustrating the highly competitive environment for students, median demand metrics weakened slightly, including matriculation, selectivity, and graduation rates. Because of the pandemic, most of the private colleges and universities we rate did not require standardized test scores as part of the application process, and very few are requiring them as of June 1, 2023, leading to higher application rates but lower selectivity and slightly lower matriculation rates.

For fiscal 2022, financial performance was still bolstered by federal COVID-19 relief funding, with most colleges and universities posting strong operating margins. However, for fiscal 2023, with the exhaustion of relief funds combined with rising expenses, we anticipate that overall operating margins will be weaker, which could depress financial resources.

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

• Median FTE enrollment remained relatively flat (0.3% increase), thanks mostly to growth at the highest-rated institutions (14.8% at 'AAA' rated universities), offset by continued enrollment decreases at lower-rated institutions (2.2% and 3.8% at the 'BBB' and speculative-grade levels, respectively).
• Other demand metrics including median selectivity, matriculation, and graduation rates remained at or below fiscal 2021 levels.
• Median operating performance across all rating categories, except for speculative-grade, remained positive, and the overall median was only slightly weaker than that of fiscal 2021.
• As the cost of borrowing rose, debt burdens increased among the 'AA', 'A', and 'BBB' rating categories.
• Balance-sheet ratios compared to both debt and total adjusted operating expenses remain above pre-pandemic levels, albeit slightly lower than in fiscal 2021.

Table 1

The sample size for our private college and university median ratios for fiscal 2022 was 273 (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, and music 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

Ratings Stabilize As Pandemic Uncertainty Recedes

Since June 15, 2022, S&P Global Ratings has assigned four new credit ratings: two in the 'BBB' category and two in the speculative-grade category. In addition, we lowered 19 ratings, including two to the 'BBB' category from the 'A' category. We raised nine ratings, including one to 'AAA' from the 'AA' category, one to the 'A' category from the 'BBB' category, and three to the 'BBB' category from the speculative-grade category. All other rating actions, positive or negative, remained in the same rating category.

We continue to see a standard rating distribution, with 71% of rated private higher education institutions in the 'A' and 'BBB' categories (chart 2). The outlook distribution reflects the abating pandemic uncertainty, with 85% of the ratings having stable outlooks as of June 1, 2023, a significant improvement from 80% on June 15, 2022. In addition, only 10% of our ratings had a negative outlook and 5% of ratings had a positive outlook, considerably improved from 16% and 4%, respectively, as of June 15, 2022 (chart 4). The decrease in negative outlooks and increase in stable outlooks reflect that most private colleges and universities returned to operational normality in fiscal 2022.

Chart 2

Chart 3

Chart 4

Enrollment And Demand Metrics

Post-COVID enrollment exemplifies growing divergence in the sector

Ongoing concerns from the pandemic resulted in FTE enrollment declines across all rating categories in fiscal 2021, and while many of these concerns had eased by the fall semester in fiscal 2022, FTE enrollment remained relatively flat overall (table 1). However, this stability was not experienced equally across rating categories, with FTE enrollment growing at most 'AAA' and 'AA' rated universities even compared with pre-pandemic levels, while the other rating categories faced continued FTE enrollment losses even compared with fiscal 2021. These declines increased at the lower-rated categories, with 'BBB' and speculative-grade median enrollments falling at a greater percentage than they did in fiscal 2021 (chart 5). This dichotomy illustrates that demand for colleges with stronger market position, high selectivity, high retention rates, and, typically, exceptional student quality has returned to pre-pandemic levels or better, despite the swelling competition for a shrinking population of college-age students across many areas of the county. Meanwhile, private institutions with less geographic diversity, limited program offerings, or weaker market position (especially on the lower end of the rating spectrum) are experiencing falling enrollment as a result of the increased competition.

In response, many of these lower-rated institutions have expanded recruitment strategies to attract international and out-of-state students, and have supplemented their offerings to include graduate and certificate programs. Despite these efforts, undergraduate enrollment continues to drop and median tuition discount rates continue to rise (chart 6) for most of the lower rating categories, as the competition for students intensifies. We expect the increasing struggle for students will result in the continuation of the current trends and widening disparity between universities in the higher and lower rating categories.

Chart 5

Chart 6

Most other demand metrics remain at or near pandemic levels

As a result of the pandemic, most private colleges and universities transitioned to test optional, no longer requiring SAT or ACT scores as part of the application process, in fiscal 2020. However, post-pandemic, many institutions are still not requiring applicants to submit test scores, and only about 80% of our rated schools are reporting test scores. Historically, the shift to test optional has resulted in improved reported test scores, in part due to self-selectivity, as only applicants with stronger scores submit their score with their application, while applicants with weaker scores elect not to submit theirs. This selective reporting has resulted in both median ACT and SAT scores being stronger than pre-pandemic levels (table 1).

One side effect of the move to a test-optional application process has been an increase in freshman applications for many private higher education institutions. However, median selectivity and matriculation rates have continued to weaken from pandemic levels, further illustrating the highly competitive environment. And while private colleges and universities have invested in initiatives to ensure student success and to better justify the costs associated with a college education, retention and graduation rates remained relatively flat in spite of the pressure of the pandemic (table 1). Many of these demand metrics are lagging factors, so it may take more time to see the full effect of the pandemic, specifically in graduation rates. We expect that acceptance and matriculation rates could continue to drop for many private higher education institutions that are no longer requiring tests and are facing more intense competition for college-aged students. Given the passing of the recent affirmative action ruling, we will probably see colleges increase targeted recruitment and expand financial aid programs, while a broader move to test optional is expected across the industry.

Financial Metrics

Revenue diversity is slow to return to pre-pandemic levels

For fiscal 2022, private colleges and universities returned to in-person instruction, with student housing opening to full capacity. The reopening of campuses boosted auxiliary revenue, which represented a larger portion of total adjusted operating revenue while remaining considerably lower than pre-pandemic levels (chart 7). Lagging auxiliary revenues were offset by federal money, as the majority of private colleges and universities benefited from the remaining HEERF in fiscal 2022, resulting in an increase in the percentage of revenue derived from government grants and contracts (chart 8). We expect that the vast majority of universities have now exhausted remaining COVID-19 relief funds, resulting in grants and contracts returning to historical levels. However, with increasing enrollment pressures, student-related revenues such as auxiliary revenue could be slower to return to pre-pandemic levels.

Chart 7

Chart 8

COVID-19 funds bolstered operating performance in fiscal 2022

During fiscal 2022, many private colleges' and universities' total adjusted operating expense were elevated because of one-time costs associated with fully reporting campuses. The increase in total adjusted operating expenses resulted in slightly weaker median operating performance than fiscal 2021's (table 1). However, because many private colleges and universities used their remaining HEERF money to stabilize operations, median operating performance remained positive and well above pre-pandemic levels. However, further illustrating the widening contrast between rating categories, speculative-grade private institutions produced modest median deficits as they continued to experience more severe drops in net tuition revenue and high competition for both graduate and undergraduate students.

Financial aid remains a key factor in attracting students. We assess institutional financial aid spending through the tuition discount rate, which is calculated as financial aid as a percentage of gross tuition and fees. Tuition discounting has increased across rating categories except for 'AAA' and 'AA', with the lower categories seeing the largest year-over-year growth. For higher-rated private institutions, median tuition discount rates have returned to pre-pandemic levels (chart 6), while lower-rated private colleges and universities have seen rising tuition discount rates for the past six years. In addition, while the higher-rated universities can often offset the costs associated with financial aid thanks to strong fundraising and healthy endowments, we view the higher discount rates at lower-rated universities to be a greater risk due to limited financial flexibility and more modest balance sheets to support higher levels of aid. Because of intensifying competition in the sector as a result of a shrinking pool of college-age students, combined with the increased concerns surrounding college affordability, discount rates are likely to rise further for most rating categories. In addition, as most private colleges and universities have exhausted their remaining HEERF money, and at the same time are facing inflation pressure, we expect that some will still see pressured operations, specifically at the lower end of the rating spectrum.

Chart 9

Despite market volatility, investments remain stronger than pre-pandemic levels

Fiscal 2021 market returns were unprecedented and robust, bolstering total endowment funds. However, in fiscal 2022, some market volatility resulted in decreases in median endowments across all rating categories (table 3), most significantly speculative-grade schools. However, they remain considerably stronger than pre-pandemic levels. Although these levels of endowment still provide some financial cushion for universities, market volatility and high inflation have already started to mute fundraising, specifically at the lower end of the rating spectrum, which could suppress endowment growth.

Table 3

Cash and investments remain elevated

With the adoption of the revised higher education criteria on April 24, 2023, we no longer use expendable resources to evaluate balance-sheet strength. Rather, we now use "cash and investments" as an input into financial metrics in place of "available resources" (i.e., expendable resources or unrestricted net assets). Recent market volatility resulted in a modest 8.6% decrease in median cash and investment levels in fiscal 2022 from fiscal 2021. However, this was partially offset by positive operating performance and robust market returns in fiscal 2021, resulting in cash and investments remaining higher than pre-pandemic levels across rating categories. Similarly, cash and investments compared to operations remain stronger than pre-pandemic levels (chart 10), though the higher operating expenses as a result of retuning to full operations deflate these ratios slightly.

The higher cost of borrowing in fiscal 2022 did little to deter institutions in most rating categories from issuing additional debt. Median total debt outstanding increased in most categories but dropped in the 'AAA' and speculative-grade categories. Similarly, debt per FTE rose in all categories except 'AAA' (chart 12). Despite the increased debt, the median maximum annual debt service burden, calculated as a percentage of total operating expenses, fell slightly in fiscal 2022 to 4.3% from 4.4% in fiscal 2021. Finally, across the higher rating categories, cash and investment ratios (compared to debt) weakened slightly, falling just below pre-pandemic levels; however, in the 'A', 'BBB', and speculative-grade categories, they remained higher than pre-pandemic levels.

Chart 10

Table 4

Chart 11

Chart 12

Credit Quality By Enrollment Size

Intensifying competition for undergraduate students, rising expenses, and increasing tuition discount rates are challenges for most private colleges and universities. However, these conditions are particularly vexing for smaller institutions (those with fewer than 1,400 FTE students), which typically lack the revenue diversity of the very large ones (those with more than 15,000 FTE students). In addition, most of the larger private colleges and universities have more revenue diversity, healthy endowments, and a broader alumni base to assist with fundraising, resulting in a higher degree of financial flexibility. While institutions with fewer than 1,400 FTE students are not precluded from higher ratings, there is some correlation between enrollment size and overall credit characteristics. In the 'AAA' and 'AA' rating categories, there are no private institutions with fewer than 1,400 FTE students, while schools with more than 15,000 FTE students account for 27% of 'AAA' ratings and 29% of the 'A' rating category for all private higher education institutions. In addition, within the 'A' rating category, 13% of institutions have more than 15,000 FTE students and only 8% have fewer than 1,400 FTE students. None of the institutions in the 'BBB' or speculative-grade categories have more than 15,000 FTE students, while 16% of institutions in the 'BBB' category and 27% in the speculative-grade category have fewer than 1,400 FTE students (chart 13).

Chart 13

Comparing metrics, especially those associated with demand and financial flexibility, is particularly revealing (table 5). Total FTE enrollment at the larger institutions typically consists of a smaller percentage of undergraduate enrollment, a stronger selectivity rate, and greater geographical diversity, signifying a higher resilience to demographic changes. As a result of the higher levels of demand and a strong graduate presence, larger private colleges and universities typically have significantly lower tuition discount rates, which, when combined with more diverse revenue sources, leads to more positive operations.

One the other hand, very small private colleges and universities tend to face a more competitive environment for first-year students due to typically more limited geographic diversity and more modest course offerings. This competition leads to more aggressive tuition discounting and ultimately weaker total adjusted operating performance. Although many of the smaller institutions have a relatively strong balance sheet with a limited amount of debt per FTE student, we do not consider this enough to offset the highly competitive enrollment environment, which we anticipate will intensify over the next few years.

Consistent with our methodology for this report, we have excluded specialty schools from table 5 as well as from chart 13. Although there are many specialty schools that would be classified as very small, none of them have an FTE population of more than 15,000.

Table 5

What We're Watching

Fall 2023 enrollment

Due to the growing competition for first-year students, we expect that enrollment pressure will persist for smaller, more regional and lower-rated private higher education institutions. In addition, we expect that most private colleges and universities will continue to leverage early decisions, focus on recruiting a more geographically diverse student body, and will look to modify their program offerings to meet market demand and demographic pressure. In addition, we expect that most institutions will remain test optional at least for the near term, which could weaken selectivity further. Finally, we believe the cost of higher education will remain an important tool in student recruitment, leading to continued increases in tuition discounting.

Operations without relief funds

We anticipate operations will remain pressured as most private colleges and universities have exhausted their HEERF money. In addition, while many invested in long-term cost-saving programs during the pandemic, we expect that these savings may be offset by higher expenses as a result of inflation.

Financial resources

Market volatility could result in more modest amounts of cash and investments. However, because many private higher education institutions recorded substantial net growth of financial resources from fiscal years 2021 and 2022, we expect that balance sheets will remain at or above pre-pandemic levels, specifically in the higher rating categories.

Capital investments

With the current rate of inflation, we expect that many private colleges and universities might struggle to fund capital projects, resulting in changes in overall capital plans with the focus remaining on attracting and retaining students. In addition, as hybrid work has become more normal for many private colleges and universities, they may elect to alter previously designed capital plans to better repurpose space on campuses. In this environment, we expect that institutions with more financial resources will differentiate themselves and improve their overall demand profile, resulting in a widening gap between rating categories within the sector.

Appendix

Table 6

Table 7