While Americans are already burdened with massive student loan debts that will take decades to repay as education costs continue to rise, schools have been increasing tuition.
However, a report on Tuesday from Fitch Ratings indicated that recent tuition hikes at private colleges and universities were still insufficient to keep up with rising expenses.
According to the ratings agency, the median adjusted operating margin dropped to its lowest point in over a decade last fiscal year, even though schools’ investment levels and endowment support remained relatively steady. The outlook doesn’t appear promising either.
“Looking ahead, additional operating pressure is expected, with many institutions grappling with elevated costs and a fractured enrollment environment,” said Emily Wadhwani, senior director at Fitch, in a statement.
Cash flow will likely face more pressure, especially with earlier issues in the FAFSA student aid process adding to concerns about fall enrollment, she said.
After two years of declines, fiscal 2023 saw an improvement in net tuition and fee revenue, according to the report. However, the median increase was still well below pre-pandemic levels and insufficient to offset inflation.
Consequently, Fitch-adjusted operating margins fell in all rating categories to a median of negative 1.7% across the portfolio of schools. This also marks the first full year since fiscal 2019 with little to no federal institutional aid.
There is also a significant divide among private schools, the report noted. Schools with the highest debt ratings—in the AAA and AA categories—saw an increase in student fees as a percentage of total revenues, but lower-rated schools did not.
While margins at AAA and AA colleges dipped, they remained healthy and were even higher than in any of the three years before the pandemic, Fitch noted. For lower-rated schools, however, the opposite was true.
“The sector bifurcation will continue to widen the credit gap between larger, more selective institutions versus their smaller, less selective, and more tuition-dependent counterparts,” the report said.
In other words, elite schools with substantial endowments and wealthy donors are less vulnerable than those that rely more on tuition revenue and have more volatile enrollment.
The report comes weeks after the abrupt closure of the University of the Arts in Philadelphia amid plunging enrollment and “significant, unanticipated expenses.”
In fact, private colleges have been closing at a rate of about two per month, according to the State Higher Education Executive Officers Association.
This is happening as the total number of U.S. college students has been decreasing for years, even before the pandemic caused a sharp drop in enrollment.
Public colleges and universities face similar pressures, with the number of students enrolled in those schools plunging to 10.2 million in 2023, down 12% from a 2011 peak.
As a result, tuition and fee revenue net of financial aid fell 3.3% in 2023 to an average of $7,353 per full-time student, according to a report from the State Higher Education Executive Officers Association, marking the largest decline since 1980.
