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Tuition Revenue Down

November 25, 2013

After years of leaning on tuition increases to make up for declining state support, about four in 10 public universities now report tuition revenue is not keeping pace with inflation, according to a new report by Moody’s Investors Service.

Moody’s surveyed 114 four-year public universities and 173 four-year privates and found that negative trends -- inability to raise prices, declining enrollments and heightened regulatory and political pressure to keep down tuition -- are “now buffeting public universities with greater intensity.”

Revenue from tuition is projected to grow at a rate below inflation at 44 percent of publics and 42 percent of privates surveyed by Moody’s. Conditions at colleges and universities outside the survey could be even worse because Moody's rates colleges that are in a position to borrow money.

The lower tuition costs might come as a relief to students and families upset about rising tuition prices, but for institutions the loss of revenue could mean operational changes that could be felt in classrooms.

“I think what it really means is that one of the key revenue sources for higher education is not growing, so their ability to make strategic investments in program and faculty is declining,” said Susan Fitzgerald, a senior vice president at Moody’s who worked on the report.

The report said institutions most at risk are regional public universities and “smaller private colleges lacking a well-defined niche.”

After several years that featured dramatic cuts to the state subsidies for public institutions, state revenue is now basically flat. That, together with the inability to raise tuition revenues, will “force public universities to aggressively contain costs, pursue operating efficiencies, re-examine programmatic commitments, and seek new revenue opportunities.”

The Moody’s report isn’t exactly news to college business officers, who largely lack confidence in their institution's business model, but it does show widespread problems and foreshadows what could be a fundamental reckoning.

“The question is, as state appropriation continues to decline, how much further can it decline without doing significant damage to access and affordability?” said Bob Shea, a senior fellow at the National Association of College and University Business Officers.

At private colleges, the tuition revenue strain is now surpassing the “prior peak pressure point” during the recession -- the 2010 budget year, according to Moody’s. Nearly a fifth of the private universities in the survey saw net tuition revenue decline. The potential for growth any time soon is also bleak because of “a more limited pool of high school graduates, increased scrutiny of the value of a degree and flat enrollment.”

Hal Hartley, senior vice president at the Council of Independent Colleges, which represents many private colleges, especially small ones, said his members are holding their own despite the economic weakness. 

“There’s a bright side to this report, it is that these institutions are investing even more in their funds into scholarship and grant aid to make college affordable for students and their families,” Hartley said, referring to the efforts to hold down cost, often by increasing the discount rate to students, which also means taking a revenue hit. “It’s an incredible commitment on their part.”

Still, he said, there’s a concern that these efforts could reach a tipping point.

“I think any college president will tell you these present trends are difficult to sustain, and we keep hoping for recovery in the marketplace,” Hartley said.

 

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