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Colleges in Financial Trouble: Moody’s Bond Ratings and the US News Rankings

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No doubt about it: there are many colleges in financial trouble. Moody’s Investors Service published a report this past Monday, in which it kept in place an overall negative outlook for the higher education sector. There are many colleges in financial trouble. (Inside Higher Ed reported on it. But you can’t actually look at the report unless you subscribe to Moody’s. And a subscription is an expensive proposition if you aren’t in the investment biz).

Some colleges have increased their financial reserves. That’s good. About 15-20% of colleges have added to their more than 3% to their coffers in FY2019. Many states legislatures are starting to support higher education a bit more (except Alaska, where the governor recently announced draconian cuts), and some private universities are in relatively sound financial health.

However, 30% of colleges and universities have seen their reserves (i.e., their “savings accounts” or their “endowments”) decline by more than 3% in the past year.

Meanwhile, a strong economy is likely drawing many prospective students into the labor force instead of classrooms, and the number of new high school graduates is stagnant nationwide.

Low revenue growth means a focus on cost containment, and 20 to 30 percent of the [higher education] sector will face difficulty budget choices, according to the report


Prices Are Up, But Financial Health Is Down

What the heck is going on? Tuition prices are rising around the country by at least 3% at most colleges and universities. And yet nearly a third of these institutions are digging into their rainy day funds to make ends meet.

Here is my thumbnail analysis:

An Oversupply of Colleges

First, we have an over-supply of seats in higher education today. States have over-built their higher education systems. For example, a search of the College Board’s “Big Futures” site indicates there are seven four-year universities in Colorado (a state of 5.7 million people) that offer a music education major. At a time when public schools in Colorado and elsewhere are reducing their commitments to the arts and music programs are certainly not expanding in most places, do we really need seven different universities–each with its own faculty, its own classrooms, its own rehearsal rooms, etc.?

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Lest anyone start moaning that I’m bashing on the arts, know that my own son majored in music in college, that my family is full of musicians, and my father-in-law was a public school music teacher for 38 years. I attended public schools that had awesome arts programs, and I participated mightily. I’m a huge booster for the arts. But seriously: this is a case of over-supply. We don’t have enough jobs in the state for the music teachers who already have their degrees, plus there are plenty of highly trained, experienced music teachers from other states who would happily move to Colorado, if there were more jobs available. Supply of music education majors outstrips demand. And yet these seven Colorado universities compete with one another to fill their slots and keep their departments funded.

Competition in Higher Education May Continue to Increase

Competition is great, of course, in our capitalist system. But sometimes it makes sense for some firms (or some universities) to just go out of business or refocus their business model when they can’t efficiently compete.

Private universities in financial trouble are going out of business fairly regularly these days. But when was the last time a state eliminated an entire university campus based on economic efficiency? Maybe that is what the governor of Alaska is attempting to do?

Graduation Rates Are A Problem

Second, graduation rates are a problem. One of my colleagues who works in admissions at a less selective school explained it this way: “I feel like I’m recruiting into a bucket with a hole in the bottom of it: I bring them in, but the rest of the school can’t keep them here.”

Nationwide, just over 50% of all students who start a four year college actually graduate with a degree. This is a national shame. There are lots and lots of reasons for these low graduation rates. Poor high school preparation in many of our secondary schools means that a high proportion of undergrads actually need remediation just to survive college (at the University of Colorado-Boulder, for example, roughly a third of entering students are not fully prepared for college.)

…Especially for Low-Income, First-Generation, Minority Students

Another reason for poor graduation rates is that many first generation students and minority students are not well-supported at many colleges. Of course, colleges and universities welcome these students on their campuses, but not all are able to provide the kinds of additional supports necessary for them to thrive. Many universities are “sink or swim” environments. Students who don’t have the background or the network (or money–more on that in a moment) to swim simply drown. This is much the critique offered by Anthony Abraham Jack of our most selective, elite universities that fail to fully integrate poor students

Of course some colleges and universities are doing a pretty good job of serving low-income and first-generation students. One of the best in my home state of Colorado is Colorado Mesa University, in my opinion. And there are state and federally funded initiatives (like TRIO) that provide additional resources to help these student swim instead of sink. But low-income and first-generation students do have a harder time getting through college than their richer, more privileged peers.

College Is Super Expensive

And so we come to the biggest bugbear that stalls our national higher education rates: MONEY. Why do so many students drop out of college short of reaching their degree? The expense. The cost of getting a college degree is so outrageously expensive that students and their families just cannot make it work. Some students work full-time jobs in order to pay tuition and expenses, but then can fall behind in their school work. Some families have saved enough money to pay for a year or two, but then either have to take on considerable debt (which we all know is a huge social problem in this country) or simply wait until they win the lottery or their rich uncle Larry dies.

So while admissions professionals at colleges and universities (also known as the “sales and marketing team”) recruits hard in a shrinking pool of high school graduates, the same colleges and universities cannot keep all these recruits on campus for the time it takes to earn a Bachelors degree.

A “bucket with a hole in it.” Indeed.

…And Yet There Are Many Colleges in Financial Trouble

So in order to survive, financially, more and more colleges and universities are strapped. They are digging into their savings. And they are raising their discount rates—trying to lure new students with discounts off the list price of tuition. (Though as with any statistical indicator, it’s not clear that raising the discount rate is necessarily an indication of poor financial health. (See this explanation in this opinion piece in Inside Higher Ed).

So Moody’s Investor Service is not very bullish on this sector. If you were an investor, you probably wouldn’t want to put your money into this business. Maybe there would be a few institutions that might pay a good return. But the sector as a whole? There are a lot of colleges in financial trouble. Better to look elsewhere.

Moody’s and the Rankings

Like most people in the higher education biz, I hate the rankings game. It’s all a silly game, and the criteria used by the rankings organization (most notoriously, US News & World Report) really don’t tell us much about the quality of the education on offer. I’m not going to open this can of worms at the moment. But suffice it to say I think the rankings are the tail that wags the dog in this industry.


And, boy-oh-boy does that tail wag. I once asked a friend of mine, the dean of admission at an Ivy League school, why they didn’t just dump the rankings. After all, what would and Ivy League school have to lose by leading the way away from the silliness? If an Ivy said to US News, “you guys are full of beans and we’re simply not going to participate in your stupidity any more,” many other colleges and universities would have the political and economic cover to stop participating, too.

But this dean of admission explained that this fantasy would never come true. Why?

Because the Moody’s bond rating of a college or university is tied to its ranking.

That’s right. A university’s ability to borrow on the capital markets hinges on the university’s rank in US News.

A Symbiotic Relationship

So Moody’s and US News feed on one another. Financially speaking, colleges depend on both indices to survive.

Think about it. A college in financial trouble needs desperately to improve its rankings. If it doesn’t, it not only can’t compete for ranking-obsessed students and their families. But it also cannot borrow to make whatever investments it wants to make to change in its programs, improve its services, or otherwise expand its financial base.

So what’s left for a school with a poor ranking, a shrinking student body, and an inability to compete head to head with the big boys? It spends down its savings.

And thus begins the downward spiral for some of these colleges in financial trouble. Poor rankings leads to fewer recruits–especially higher caliber ones. And fewer good students with adequate financial resources means more of them drop out before finishing their degrees. Which leads to a decline in the rank of the institution–thus leading to a downgrade of the bond rating. Thus the college can’t borrow to make improvements to make itself more competitive. And the trustees have to dig further into the kitty just to keep the lights on.

What Does This Mean For the Consumer (YOU)?

First, all this means that higher education remains a buyer’s market. While there are a few dozen universities that reject more applicants than they admit, the overall college acceptance rate is about 70%. And some universities that offer good educational value have acceptance rates a lot higher than that.

Second, students with a good academic record can expect hefty discounts at many, many universities–and not just at colleges in financial trouble. True, you might not get much of a discount at the more selective schools that do not offer merit discounts. However, many schools do offer awesome financial aid packages to the handful of poor students they take every year). Once you get past the very top tier of primarily private universities, there are lots of bargains out there.

You just need to know where to find them.

And how do you find them?

How to Avoid Colleges in Financial Trouble

Well, first and foremost you need to think very carefully about what a quality education looks like for your family.

Then you need to focus closely on those criteria as you search for the colleges that match them.

It’s pretty simple, really. And at the same time, it can be pretty difficult.

So if you’re looking for some help in this, we just might be able to provide it. We offer assistance with the college search, and there is nothing we like better than to find those bargains out there: schools that offer exceptional educational quality at an affordable price.

If you’re interested, check out what we offer. Then give us a call.



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