High-cost colleges beware

Beth Ware, Senior Municipal Bond Analyst | August 20, 2013

  • High-cost colleges beware: newly cost-sensitive students may pressure your business model.
  • Municipal bond investors should be aware that certain categories of universities are likely at greater risk of credit rating downgrades.
  • We remain concerned with universities that do not have a strong balance sheet, revenue flexibility and/or reputation to compete long-term in an industry where revenue growth is projected to be stagnant.

The cost of higher education has increased dramatically in recent decades, to the point where it is not uncommon for the all-in costs for top-tier not-for-profit private schools to exceed $60,000 annually. The net cost (after grants, scholarships, loans) to attend some of these schools is approaching $25,000. (The gross and net costs of many colleges and universities can be found at the U.S. Department of Education website.) The resulting sticker shock has caused families to take a step back and rethink their school options.

We believe the combination of steadily increasing costs, stagnant wages and an uneven economy has led and will continue to lead to the cost of a college degree becoming a more significant component of an applicant’s decision making process. We believe that that higher cost programs over the medium-term are likely to see a drop-off in demand, and subsequent pricing pressures, as families are either unable to afford the price or decide another lower-cost school represents a better overall educational opportunity.

Reduced demand has the potential to negatively affect a school’s enrollment, acceptance rate, revenues, balance sheet and financial flexibility. If you are expensive on a net basis, you will need continued strong demand plus a robust balance sheet to withstand the potential negative impact of a more cost-sensitive consumer. A strong financial position, including a sound balance sheet, may provide an institution with the necessary flexibility to increase tuition discounting to attract students and to pay debt service and fund capital projects.

  • The very top-tier schools with the strongest reputations, which generally have sound balance sheets and large endowments, may feel some pricing pressure but are likely to see minimal lasting negative impact.
  • Lesser known high cost schools, with relatively weak financial positions, are likely to feel the brunt of lower demand and increased pricing pressures, putting them at risk of rating downgrades.
  • Niche schools remain at the greatest risk. Several fine art schools in major markets are among the more expensive schools on a net basis. The question remains: Will parents of artistically talented children continue to support the high cost of an art/music/theatre education given that it is not difficult to find the same caliber of teaching at a liberal arts college? To date, a number of these organizations continue to generate adequate demand.
  • Specialty schools can remain high cost – as long as there are adequate jobs for their related industry. However, the concentrated risks could lead to greater volatility, if the industry has a major employment shift (law schools for example).

We remain concerned with universities that do not have a strong balance sheet, revenue flexibility and/or reputation to compete long-term in an industry where revenue growth is projected to be stagnant. Such entities are likely at greater risk of credit rating downgrades.

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Beth Ware

Senior Municipal Bond Analyst
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