Key Takeaways
U.S. higher education issuers saw a return to credit stability in 2022. With significant help from federal emergency funding, expense cuts, and a full return to on-campus life, colleges and universities entered 2022 with greater financial flexibility, even though enrollment was down across the sector.
Active management supported credit quality across the sector. Higher management turnover, coupled with operational and other event-driven challenges that tested issuers, reinforced the need for sound governance and internal controls to mitigate risk.
As we look ahead to 2023, key questions will affect credit quality. What will be the lasting implications of the COVID-19 pandemic for the sector? Will enrollment return to pre-pandemic levels? How will colleges and universities fare amid inflation and rising expenses? These questions will be detailed in our 2023 sector view report.
As 2022 winds down, we reflect that while the pandemic has not translated into major erosion in credit quality across higher education issuers rated by S&P Global Ratings, the divide between higher- and lower-rated schools continues to widen. Many higher education institutions were already facing operational and financial issues before the pandemic, and while federal funding helped those schools at least maintain operations in fiscal 2022, there is less certainty for fiscal 2023 and beyond. Many schools will have to increase spending to maintain and attract staff and faculty, as well as students. Schools that can raise tuition to offset these increases with little impact on enrollment will likely manage through inflationary pressures better, but those with less flexibility will face operational stresses with limited to no federal funds remaining to offset costs. Enrollment rebounded in fall 2021 and fall 2022, but still remains below pre-pandemic levels, after material COVID-19-related declines. Across the higher education sector, consolidation has been on the rise throughout the year--and we expect it will accelerate.
The significant improvement in balance-sheet strength during 2021 helped support credit quality despite declines in the investment markets through 2022, as reserves are generally still consistent with, or better than, pre-pandemic 2019 levels. Therefore, balance sheets are still providing some cushion, albeit more limited. The general direction of the economy will be important as inflation, rising expenses, and labor shortages continue to affect college and university budgets. Our chief U.S. economist has indicated a shallow recession is likely in 2023 ("Economic Outlook U.S. Q1 2023: Tipping Toward Recession," published Nov. 28, 2022, on Ratings Direct), which could further affect parents' discretionary income and choices, reduce fundraising, and complicate efforts by colleges and universities to improve their financial performance.
We invite you to hear more about our forward-looking sector view during our 2023 Outlook Webinar Series. You may register here.
Rating Performance
Despite the pandemic, the rating distribution for U.S. higher education issuers remains strong and the outlook distribution has improved throughout 2022 (see charts 1 and 2). About 10% of rating outlooks are negative compared with about 23% this time last year; and 4% of our outlooks are now positive, compared with near zero this time last year. Year to date in 2022, we have added 11 new higher education ratings, all of which were for private colleges and universities. Rating activity so far this year has been fairly comparable with that in 2021, with downgrades only slightly exceeding upgrades. This is stark contrast with 2020, when we had 34 downgrades and only four upgrades, underscoring some return to credit stability.
Chart 1
Chart 2
2022 Higher Education Thought Leadership--In Case You Missed It
- U.S Higher Education Ratings Actions, 2021, Jan, 21, 2022
- U.S Higher Education Ratings Actions, First Quarter 2022, April 11, 2022
- U.S Higher Education Ratings Actions, Second Quarter 2022, July 13, 2022
- U.S Higher Education Ratings Actions, Third Quarter 2022, Oct. 20, 2022
- U.S. Public Finance Mid-Year Outlook: The Heat Is On, July 14, 2022
- Outlook For Global Not-For-Profit Higher Education: Out Of The Woods, But Not Yet In The Clear, Jan. 20, 2022
- Federal Funds Kept U.S. Colleges And Universities Afloat; Some May Sink When They're Gone, June 2, 2022
- U.S. Not-For-Profit Public College And University Fiscal 2021 Median Ratios: Federal and State Funds Relieve Pandemic Pressure, Elevate Margins, July 12, 2022
- U.S. Not-For-Profit Private College And University Fiscal 2021 Median Ratios: Financial Margins Improve, Balance Sheets Strengthen Despite Enrollment Declines, July 12, 2022
- Cyber Risk In A New Era: U.S. Colleges And Universities Go Back To School On Cyber Security Preparedness, Sept. 29, 2022
- U.S. Privatized Student Housing Occupancy Rebounds; Ratings Will Take Longer To Recover As Projects Recoup Losses, Oct. 17, 2022
- U.S. Not-For-Profit Cultural Institutions’ Credit Quality Held Steady During The Pandemic, Nov. 28, 2022
- Advancing Or Adapting: The State Of Play In U.S. Higher Education, Nov. 29, 2022
- U.S. Public Finance Year In Review: Credit Stability. Will It Last?, Dec. 6, 2022
This report does not constitute a rating action.
| Primary Credit Analysts: | Jessica L Wood, Chicago + 1 (312) 233 7004; jessica.wood@spglobal.com |
| Laura A Kuffler-Macdonald, New York + 1 (212) 438 2519; laura.kuffler.macdonald@spglobal.com | |
| Research Contributor: | Natalie Nash, Salt Lake City +1 4153715013; natalie.n@spglobal.com |
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