Financial experts sound alarm on colleges going bankrupt
- Fitch Ratings released a report warning of the effects that declining enrollment could have on small, private colleges.
- The report comes as colleges nationwide face uncertainty regarding the fall semester.
A new report from Fitch Ratings warned that declining revenue from tuition costs could threaten the financial solvency of private colleges.
As families of students struggle as a result of the coronavirus, colleges could be forced to discount their tuition rates to unsustainable levels, according to the report, even as the number of students enrolling at these colleges also decreases.
“For higher education,” the report said, “the base case assumes that most residential campuses will reopen for the fall 2020 session with enrollment declines of up to 10 percent. Fitch’s downside scenario assumes a slower economic recovery driven by prolonged or recurring coronavirus-related disruptions, including sporadic campus closures into 2021."
"This scenario anticipates larger enrollment declines of up to 20 percent in addition to other operating and financial pressures, such as underperforming auxiliaries and weaker endowment financial performance," the report adds.
[Related: Disturbing number of college presidents not confident in their own school's financial stability]
A 10 percent enrollment decline would lead to an average revenue decline of 8 percent while a more severe 20 percent enrollment decline would result in an average revenue loss of 17 percent. Both, according to the report, would require offsetting measures.
“In a 5 percent decline scenario, about 65 percent of private colleges would maintain coverage in line with current rating levels. With a 10 percent decline, about 50 percent of institutions would maintain sufficient coverage, and at a 20 percent decline, just 15 percent would.”
Fitch concluded by noting that colleges will likely make more short-term sacrifices than long-term, mentioning extraordinary endowment draws, staff salary reduction, and holding off on capital expenditures.
“In many instances, downgrades can prompt additional financial pressures,” Emily Wadhwani, Director at Fitch Ratings, told Campus Reform, “Particularly, as we look at those that are already rated lower on the spectrum.”
She noted that for many donors, falling below financial solvency is a philosophical barrier.
When discussing concerns over credit ratings, she noted that “there are two ways to think about it- did you generate enough to cover your debt service requirement economically? And did you generate enough to cover covenant services?”
Debt service refers to a debtee’s ability to make expected payments on a debt, while covenant services are agreements that a certain amount of capital will be held in reserve over the payment, acting as a cushion. Wadhwani went on to say that there may be missed covenants in FY21, but not necessarily rating action. Rating action (the change of an organization’s credit rating) is typically taken over missed or delayed payments.
However, Wadhwani encouraged, things are still better than in 2008. Colleges have stronger balance sheets from the last recession, along with decreased reliance on external sources of funding.
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