US university debt leaves small colleges exposed

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Millennial and Gen-X graduates are not the only ones staring down a mountain of student debt in the US. Colleges and universities are also feeling the squeeze. Shrinking revenues, rising costs and smaller enrolments led to years of heavy borrowing. Now the sector is poised for a shakeout.

US institutions of higher learning went on a bond-selling spree during the pandemic. Between 2020 and 2022, they raised more than $70bn via corporate and municipal bond sales, according to data from Refinitiv. The sector now has $230bn of debt outstanding, representing between 8 and 9 per cent of the total US municipal bond market. 

Of the 447 universities with a credit rating from S&P Global Ratings, more than a third are rated triple B plus or below. Rating peer Fitch warns that the sector faces a deteriorating credit environment in 2024. Expense ratios are increasing. In 2011, expenses were 93 per cent of revenue on average. By 2020, average ratios went from a surplus to a deficit, according to Bain & Company.

Institutions with large endowments and strong demand, such as Harvard and Yale, will be fine. Most issued long-dated 30-year fixed rate bonds. Smaller, less prestigious private colleges will struggle. Many are dependent on tuition dollars for their annual operating budgets. They are most vulnerable to enrolment declines.

Overall, undergraduate enrolments ticked up year on year in 2023. But they remain below pre-pandemic levels. Further decline is expected. Lower birth rates in the wake of the financial crisis mean there will be fewer students in the 2025-2026 school year. The high cost of tuition is also prompting a rethink on the economics of obtaining a degree.

Expect the US higher education landscape to become increasingly bifurcated between top-tier institutions and lesser-known ones. Since 2016, at least 100 colleges have closed or merged in the US. That list is about to get longer.

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