Moody’s lowers higher ed outlook to negative amid coronavirus crisis

Dive Brief:

  • Moody’s Investors Service downgraded its outlook for the higher education sector from stable to negative, predicting widespread instability as a result of the new coronavirus.

  • Colleges will face “unprecedented enrollment uncertainty” headed into the next fiscal year as the virus and the disease it causes, COVID-19, throws the country into economic turmoil, the credit rating agency wrote in an analysis released Wednesday.

  • Institutions’ budgets will immediately be stressed as they are forced to respond to outbreaks of the virus, and those with weak finances will likely have more trouble adapting to trying conditions in the future.

Dive Insight:

Colleges’ budgets have already been hit by the spread of the coronavirus, which reached 214,000 confirmed cases worldwide and 7,660 in the U.S. as of Wednesday afternoon, according to data gathered by Johns Hopkins University. 

As institutions shift classes online and move to vacate dormitories, some are promising partial refunds for room, board and other auxiliary expenses, money that colleges have come to rely on more heavily in recent years. Moody’s notes that auxiliary areas of college operations — housing and dining, as well as parking systems and athletics — will face immediate revenue declines. This comes as institutions are devoting new funding to support virtual instruction. 

Perhaps more concerning is the potential for the virus to affect institutions’ enrollment yields, or the number of admitted students who go on to commit to a college. Domestic students may be disinclined to enroll in a four-year institution amid the economic uncertainty caused by the spread of the virus, which economists predict could cause a recession. International students face even more challenges attending an American college in light of travel bans and other difficulties resulting from the pandemic.

A dip in international student enrollment would deeply imperil the sector, Moody’s analysts wrote. These students have historically been an important source of tuition revenue, given that they tend to pay full sticker price. This population had already been declining over the last few years due to changes in immigration policies, Moody’s added.

Recruitment has become volatile, with colleges unable to hold the regular on-campus events for admitted students that help secure their commitment to an institution, Moody’s wrote. 

Roughly 30% of both public and private colleges that Moody’s tracks were running operating deficits, and the agency expects those institutions will have difficulties weathering an economic downturn. For about 5% to 10% of institutions, weak operating performance and low liquidity levels will make the situation even more dire.

Moody’s analysis assumes parts of the economy will bounce back in the second half of the year, but it notes that “several plausible developments could lead to a far more negative scenario,” such as if COVID-19 infection rates escalate and outbreaks last longer.

The higher education sector enjoyed a brief period of security in Moody’s eyes after the agency boosted its outlook to stable from negative in December. In that report, though, Moody’s wrote that factors such as reductions in donations could hurt the industry. At the time, Moody’s indicated state support from colleges might be strong. 

However, in their latest review, analysts wrote that funding could diminish in an economic recession. Additionally, they explained, volatility in the financial markets could threaten endowment returns and private gifts

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