Tuition discounts could hurt private colleges amid pandemic, Fitch says

Dive Brief:

  • Enrollment could fall 5% to 20% across the higher education sector this fall because of the coronavirus pandemic, according to a new report from Fitch Ratings. 
  • Private colleges, in particular, could feel the burn as they tend to rely more heavily on tuition and fee revenue than public institutions, the report notes.
  • While those private colleges may be inclined to discount tuition to attract more students, Fitch analysts said the national average tuition discount rate, at roughly 40%, is “unsustainable.”

Dive Insight:

The report, which is based on the institutions Fitch rates, puts numbers to the uncertain calculus colleges are using to decide whether and how to reopen campus. 

Its conservative assessment predicts most residential campuses will reopen for the fall with up to 10% fewer students than a year ago. A more severe scenario, which would involve additional coronavirus-related disruptions, could see enrollment declines as high as 20%, as well as other financial and operating pressures. 

Private colleges could largely absorb an enrollment decline of 5%, the analysts note. But decreases of 10% and 20% would equate to a median drop in revenue of 4% and 9%, respectively, and require institutions to cover those losses to avoid a hit to their credit ratings.

Assuming they took no other steps to offset the impact of enrollment declines, taking in 20% fewer students would require a 5% reduction in expenses for one in five private colleges Fitch rates. Most private institutions that would need to cut costs by 15% or more have average or poor credit ratings.

Enrollment is an open question for much of the sector right now. Recent surveys have indicated students don’t want to begin the fall term online, though some schools that decided early to stay remote said they did so in part to focus on improving virtual instruction.

But high unemployment rates have some wondering whether colleges will see an uptick in enrollment as people wait for the economy to improve. Moody’s Investors Service predicts enrollment could rise between 2% and 4% this fall based on patterns from previous economic downturns. 

Even still, Moody’s analysts expect average net tuition and auxiliary revenue will fall 5% to 13% across the sector. That’s primarily because more students are likely to attend lower-priced colleges and households may struggle to pay for higher education — leading to a decrease in critical revenue streams even if enrollment grows, they note. In particular, colleges could see less demand for auxiliary services such as student housing and offer more financial aid to attract students.

Tuition discounting could be problematic for private colleges in light of the pandemic, Fitch analysts contend.

Discount rates are expected to average a record of nearly 53% this year for first-time, full-time students in their first year of college, according to recent data from the National Association of College and University Business Officers (NACUBO). Discounts rates for all undergraduates averaged close to 48%.

But enrollment of first-time undergraduates decreased 3.2% and net tuition revenue shrank 1.3% for the year, NACUBO found. The decreases were biggest at bachelor’s institutions, where net tuition revenue fell 1.8% and enrollment dropped 5%. 

The median discount rate across the private colleges Fitch rates is 35%, though individual rates range from 10% to more than 60%, it noted.

NACUBO’s data was gathered before the pandemic started. Since then, college enrollment officials have expressed concern that students may sit the year out. Some schools are walking back planned tuition increases or are promising free tuition and other perks to encourage students to enroll.

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