Colleges and universities in financial peril, Fitch Ratings warns

Colleges and universities are facing a perilous financial position even as tuition fees continues to rise, according to Fitch Ratings.

Many educational institutions are "grappling with elevated costs and a fractured enrollment environment," exacerbated by issues with the Free Application for Student Aid scheme.

Figures from the National College Attainment Network suggest the number of completed applications for FAFSA has declined by 250,000 seniors year on year.

That report went on to warn this could directly affect the number of students heading to class in the fall—hitting revenues in the higher education sector even further.

FAFSA helps determine whether students of all incomes are eligible for financial aid, but it's estimated that over one million of them have faced glitches with a newly rolled-out system.

This creates a risk that some will enroll in college without knowing how much it will cost, prompting some to defer their study for another year.

Fitch Ratings' senior director Emily Wadhwani said, "Additional operating pressure is expected, with many institutions grappling with elevated costs and a fractured enrollment environment."

She went on to warn that some private colleges and universities could see their adjusted operating margins "falling to their lowest point in a decade."

Although tuition fee revenue growth did return in the 2023 fiscal year, recovering after a pandemic-induced slowdown that lasted two years, it has failed to keep up with inflation.

Unsurprisingly, larger schools with high debt ratings are also best prepared to weather the storm—especially if they benefit from wealthy donors and generous endowments.

Evolving trends

All of this comes against a backdrop of fewer and fewer Americans signing up for higher education in the first place.

According to State Higher Education Finance figures, 11.1 million students enrolled in 2011—but in each of the 12 years that followed, this number has dropped to 10.2 million, a 12% decline.

What's more, there's a huge disparity in funding across the U.S. per student at this level—and in 50% of states, it remains stubbornly below the level seen prior to the 2008 financial crisis.

According to the Hechinger Report, which specializes in education journalism, an average of one college a week is now closing nationwide.

The decision to shut can often be pretty abrupt, with in-depth research by the State Higher Education Executive Officers Association exposing the impact it has on students.

When colleges close, students are 71.3% less likely to re-enroll somewhere else—and even if they do, they have less than a 50% chance of graduating with a degree. Part of the problem lies in how some credits cannot be transferred, prolonging their study… as well as the cost.

The difficulties surrounding FAFSA are certainly an unwelcome headache for the students attempting to take the next step toward their dream careers. But for the embattled colleges and universities they're aspiring to go to, it could be fatal.