This past year in higher education has been fraught with challenges, both new and chronic. Some issues turned out just to be short-term, windy conditions. Other issues, however, have continued to wreak havoc and may yet build into major storms. And new issues continue to appear on the horizon. That is why we have focused our message on objective assessment, planning, and preparation—all vitally necessary to survive the ever-changing weather of higher education.
Our blogs in 2023 began with a focus on capital markets and credit management: in January, we looked at some of the major headwinds colleges and universities were facing in the year ahead, and in February, we shared the perspectives of the three main ratings agencies—Fitch, Moody’s, and S&P Global—regarding current and future challenges for higher education.
There has been some good news in the economy and the capital markets. At the beginning of the year, there were serious concerns about an economic slowdown or recession as the Federal Reserve raised interest rates and tightened its monetary policy to combat rising inflation. At year’s end, the threat of inflation may be receding and optimism that the Fed might manage a “soft landing” is growing. Markets have also rebounded, with the S&P 500 up about 21% by the end of November 2023. The Fed has not yet begun lowering interest rates—keeping the cost of accessing capital higher than it has been in recent years—but rates have stabilized and are anticipated to go down in 2024.
At the same time, while the rate of inflation is decreasing, many of the cost increases that occurred over 2022 and into 2023 are likely here to stay. With limited ability industry-wide to raise tuition, expense growth will continue to outpace revenue increases in many cases. Indeed, the average rate of tuition increases for 2023-24 remained well below the rate of inflation. For institutions that rely heavily on tuition and fees, this will present a significant challenge.
There was some good news on enrollment—overall undergraduate enrollment for Fall 2023 increased slightly—but as an article in Higher Ed Dive reported, there are “storm clouds ahead.” First-year student enrollment declined at both public and private four-year colleges and universities, down 6.1% at public institutions and 4% at private not-for-profit colleges. Short-term and certificate programs grew the fastest, highlighting again the growing strength of nontraditional education in the higher ed space.
Our February blog summarizing our conversation with the rating agencies noted their observation of a widening split between highly selective universities, which are generally doing well, and smaller regional private institutions, many of which are struggling. That continues to be the case, but an additional headwind has emerged as political tensions abroad expose deep divisions on the campuses of some of the nation’s most prominent universities. They have come under scrutiny by Congress, and as we move into the 2024 election year, criticism of higher education has come back into the political spotlight, with critics on both sides of the political aisle. The long-term impacts of this criticism are unknown, but the focus increases the risk of reduced funding by both federal and state governments and by major donors.
Our other blogs from 2023 discussed ways in which colleges and universities can seek to navigate these headwinds and, potentially, mitigate the strength of the storms. As we have consistently stated, we believe that urgency, focus, and objective analysis remain essential as we move into 2024 and beyond. The measures that can be undertaken by colleges and universities include:
- Careful stewardship of the institution’s financial reserves, as they provide an essential cushion to help institutions weather periods of challenged financial performance and enable improved debt capacity and access to capital for institutions investing in new strategies and growth.
- A well-designed strategic financial plan, which supports execution of an institution’s strategy within an established credit and resource context, and also enables leadership to assess the risk associated with alternate strategic portfolios.
- Ongoing scrutiny of the “product mix” within the institution’s academic portfolio, which balances the perspectives from both the financial lens (i.e., profitability) and the academic lens (i.e., curricular quality and learning outcomes) and focuses on sustainable growth.
- An approach to tuition pricing that combines evaluation of the competitive landscape with careful analysis of student and academic product mix.
We will be meeting again with the rating agencies’ higher education leaders early in 2024 to gain further insights into the challenges and opportunities colleges and universities will face in the coming year. We have already seen that the agencies’ outlooks view the upcoming weather in 2024 differently—some see winds and others see storms. Look for registration information for that webinar in the weeks ahead. It should be an interesting conversation, so bring an umbrella.
In the meantime, we hope you all find the opportunity to recharge and enjoy the holiday season and look forward to a happy, healthy, and prosperous year ahead.
