Moody’s Lowers Outlook on Higher Education Sector

Eva Bogaty, an analyst for Moody's Investors Services, has authored a report that cuts the outlook for the U.S. higher education sector to negative, Bloomberg reports. The performance concerns come from the belief that the current higher education model is unsustainable and a substantial overhaul will be required in order to put the industry back on sound financial footing.

Since 2009, Moody's has maintained a negative rating for U.S. colleges and universities, although it considered major research institutions to be stable. Now with tuition growing at an unprecedented rate and consumers expressing higher levels of price sensitivity due to the 2008 economic collapse, the stable outlook on even the largest schools is no longer justified.

The report also predicts that the trend of declining state funding for public colleges and universities is unlikely to reverse itself any time soon – if ever. This will be another whammy to struggling schools, especially if the cuts come on top of similar pullback in federal dollars.

The rating company downgraded more than 20 universities last year, according to data compiled by Bloomberg. Among the largest was Pennsylvania's State System of Higher Education, a 14-school system including Bloomsburg University.

Moody's cut $1.5 billion of the system's debt to Aa3 from Aa2 largely because of its financial dependence on the state, which was also downgraded, it said in a release in October.

Other institutions downgraded included the private schools Franklin W. Olin College of Engineering in Needham, Massachusetts, and Morehouse College in Atlanta.

The financial struggles will be unevenly spread around the sector. While public colleges are likely to hurt the most due to reduced government aid – on which they depend for a substantial chunk of their operating expenses – private colleges will enjoy more breathing room. The prestigious members of the Ivy League, with their substantial endowment funds, are unlike to suffer any time soon; those institutions are financially comfortable enough to sustain a fall in the amount of money brought in through tuition payments.

Yet even the behemoths like Harvard aren't entirely immune. The endowment funds of the country's largest schools were hit by the fallout of the 2008 financial crisis and many have not yet recovered after the losses taken in 2008 and 2009.

While private institutions with the greatest endowments have flexibility to subsidize tuition, they are also facing more volatile returns, according to Moody's. Harvard University in Cambridge, Massachusetts, the world's wealthiest school with a $30.7 billion endowment, lost 0.05 percent on its investments in the year ended June 30 after gaining 21 percent the previous year.

01 17, 2013
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