Financial gloom worsens for U.S. colleges

New dour reports from Moody's Investor Service and Standard & Poor's show that colleges and universities will continue to face substantial financial challenges.

In issuing a "negative" outlook for U.S. higher education over the next 12 to 18 months, Moody's concluded that future tuition revenue growth will remain "meager." The financial pressures that colleges and universities are struggling with, the rating service observed, include families who can't afford college price tags, inadequate state funding and political pressures to limit tuition increases.

Another critical challenge, the Moody's report says, is the severe competition among schools for students. Many families wrongly assume that it's becoming increasingly difficult to get into most colleges and universities. In fact, it's a buyer's market at most schools and another new crop of statistics from the National Association of College and University Business Officers bears that out. The share of students receiving grants and scholarships from private schools (89 percent) has reached a historic high while the size of the average awards is also at an all-time high.

Roughly 40 percent of public and private universities will see student-generated revenue growth of less than two percent, which is Moody's proxy for inflation. Moody's observed that roughly 10 percent of public and private universities are experiencing acute financial distress due to falling revenue and weak operating performance.

In its report, Standard & Poor's noted that ratings downgrades exceeded upgrades for both public and private nonprofit colleges in 2013. The ratings service reported that public financing of higher education remains below pre-recessionary levels and appropriations are unlikely to return to historic highs.

The Moody's report observed that governments have "modestly" increased funding at public universities with average increases of three-to-four percent. Nonetheless, one out of four states will be freezing or reducing their support to their public universities. In some states, public universities are only getting more state support in exchange for freezing tuition prices. Among the schools that will face the toughest financial ride will be regional public universities, Moody's predicted.

If all this wasn't enough, Moody's notes that universities are finding it harder to attract federal government research contracts. The success rate for research grants has slipped from 19 percent in 2008 to below 15 percent. The prospects for meaningful growth will be limited for all but the top research universities.

Despite the near-term gloomy prospects, the news wasn't all bad.

Standard & Poor's observed that better stock market returns have helped endowments. Moody noted that the long-term demand for higher education will be strong with particular growth expected at the associate and master's degree levels.

The U.S. Department of Education projects 20 percent growth in master's degrees and nine percent growth in associate's degrees through the 2021-2022 school year. In addition, new certificate programs and more offerings in online education present universities with opportunities to expand into new markets here and abroad.

Nonetheless, it's hard to see how most colleges and universities are going to escape the tightening financial noose. And that's really the scary part; there is no clear path to fiscal health.