Margins are Pressured as Inflationary and Demographic Challenges Continue to Loom
This summer, the three major rating agencies each published their fiscal 2025 median reports for the higher education sector. Though the median reports inevitably lag after the previous fiscal year as information is collected, there are few more comprehensive sources of data for how rated higher education institutions are faring. In reviewing the publications from Moody’s, S&P, and Fitch, a few key takeaways are notable, particularly in where the public and private sectors aligned and diverged in fiscal 2025.
Publics and privates alike saw operating margins consistently pressured by elevated expense growth, with tuition discounting continuing to escalate year-over-year. Both publics and privates alike continued to see solid growth in cash and investments, with balance sheet ratios generally holding steady as debt also increased moderately overall across the sector. Enrollment, however, grew steadily for public universities but was flatter for the private sector, with intensifying demand pressures and market competition beginning to take a toll. Despite a year of relative stability, the rating agencies remain concerned about the sector in the long term, with private colleges and universities under particular strain, evidenced by a far higher proportional rate of downgrades and negative outlooks relative to their public counterparts.
Despite Solid Revenue Growth, Inflationary Expense Pressures Result in Operating Margin Declines
Operating challenges were a common thread across publics and privates alike, with only Fitch private medians showing a modest increase in operating margins, while all other median reports showed operating and EBIDA margins deteriorating during fiscal 2025. These results were influenced less by revenue weakness than by more rapid expense growth, which was the primary cause of margin compression across the sector. For example, Moody’s noted that over 70% of their rated public universities grew revenue at rates above the 3.6% Commonfund HEPI higher education inflation rate (average growth rate was 5% across the Moody’s public sector), but expenses grew even quicker at 5.4%. Privates faced greater challenges, with more than half of Moody’s’ rated institutions failing to outpace inflation with revenue growth (with median growth of just 3.2%, compared to the 3.6% higher education inflation rate), while median expenses grew by 4.6%. The credit gap between larger and smaller schools continues to be a primary factor here as well, with larger, comprehensive publics and privates consistently showing greater resilience to operational challenges relative to their smaller peers.
State Support Moderates as Federal Environment Remains Uncertain
The trend of increasing state appropriations from the past few years appears to be gradually leveling off, though the funding environment remains relatively good nationwide and state support continues to be a key credit stabilizer for public institutions. Moody’s noted declines in appropriations per student in 18 of the 46 states for which they rate public universities, while S&P described appropriations as stable-to-rising in FY 2025, but with the pace of increases beginning to moderate. The federal policy environment is a further point of concern, with considerable uncertainty around how (and to what degree) research funding and international enrollment may be affected going forward. To date, the impacts of federal actions on the sector have been somewhat muted, and future actions appear likely to more substantially impact larger, elite institutions, which by virtue of that status also have greater ability to mitigate such actions and make necessary adjustments. However, the threat of additional, broader-reaching actions impacting the full rating spectrum remains very real, and the rating agencies will continue to closely monitor the potential for new policies out of Washington that might affect the sector more significantly in the future.
Publics See Modest Enrollment Growth While Challenges Persist for Privates and Discounting Increases Sector-Wide
Enrollment performance differed notably by institution type in fiscal 2025. S&P’s rated publics recorded a 2.1% increase in median FTE (a second consecutive year of growth following a six-year decline through fiscal 2023), and Moody’s’ publics grew enrollment by 1.9%. In contrast, enrollment was flatter for private universities, with decreases of 0.7% across Moody’s’ privates while S&P-rated privates saw a 0.7% increase (Fitch’s median reports did not include enrollment data, focusing more specifically on financial ratios). Rating category was once again a meaningful correlation for these results, with schools in the speculative grade categories seeing worse results for publics and privates alike.
Concerningly, tuition discounting continued to steadily rise across the sector within the data sets of all 3 rating agencies, most of which reached new highs. Private universities, particularly smaller ones, continue to bear the greatest strain, with discount rates approaching 55% for Moody’s, but the trend is notable for publics as well, with median discount rates now hovering between 35% – 37% between S&P, Fitch, and Moody’s. Institutions continue to financially manage around these financial aid increases, and in some cases (for highly rated Aaa/AAA colleges and universities, for instance), it is a considered strategy to improve access for students rather than a change forced by necessity. However, the broader trajectory remains a looming problem for the sector, with Fitch in particular explicitly calling out the trend of tuition discount rates as “unsustainable” as the median tuition discount rate for their rated private universities went from 34.5% to 40.7% in just six years (from FY 2019, before the pandemic, to FY 2025).
Balance Sheets Continue to Provide Stability, but Debt and Capital Needs Remain
With investments continuing to perform well, balance sheet ratios and financial reserves remain solid for the majority of the higher education sector. Cash and investments to debt ratios grew solidly for Moody’s and S&P medians, while Fitch’s available funds to debt ratios saw very modest sector-wide declines but were generally stable, with better performance in higher rating categories.
Expanding capital needs for the sector meant that debt and leverage remained useful tools for institutions to begin addressing capital expenditures that had been deferred for many institutions during the pandemic. Publics increased debt materially (by over 10% for Moody’s and by over 6% for S&P sector-wide), though coverage remained strong given investment gains. Privates grew at a more measured pace (around 3% for Moody’s, with S&P privates showing flat across the sector though most rating categories saw modest increases). Despite the additional debt, age of plant remained stable if not slightly elevated across publics and privates alike, suggesting that institutions focused as much on maintaining existing infrastructure as on replacing it entirely. Age of plant also remains materially longer at the bottom of the rating scale —19.2 years for Moody’s’ Baa-rated privates, compared to just 13.6 years for Aaa privates. This remains another major challenge on the horizon for credits with relatively lower financial resources available to address lingering capital needs.
Key Takeaways
At an elevated view, the FY 2025 medians show a sector that is holding steady in many ways but faces significant areas of concern that are difficult to alleviate. Enrollment has stabilized, but long-term demographic challenges continue to threaten institutions’ footholds and competitive positions. Inflationary pressures, tuition discount growth, and uncertainties around state and federal support continue to pressure management teams to operate nimbly and under substantial constraints to keep their institutions running viably and successfully. The ever-present gap between lower- and higher-rated credits continues to remain a major consideration to monitor as well, as the colleges and universities facing the biggest challenges are also often those with the most limited flexibility available to absorb them. If you have questions about the current environment for higher education and how your institution can navigate through it, either from a rating management or operational perspective, we encourage you to reach out to your Blue Rose advisor.
Meet the Author:
Max Wilkinson | mwilkinson@blueroseadvisors.com | 952-746-6048
In his role of Senior Vice President, Max Wilkinson manages a number of the firm’s clients, ensuring that their transactions progress smoothly and effectively throughout the financing process. He has significant expertise in the preparation of credit and debt capacity analyses and is experienced with the pricing and execution of fixed rate bond transactions, direct purchase bonds, and derivative and reinvestment products. Mr. Wilkinson is closely involved in every step of the financing process for clients, from initial capital planning stages all the way through closing. He joined Blue Rose Capital Advisors in 2016.
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