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From The Chronicle of Higher Education

Worsening Economy Could Cause Trouble for Smaller Colleges

By SCOTT CARLSON

Remember the generally positive outlook on higher education that Moody's Investors Service issued in January (The Chronicle, January 25)? Scratch that.

Although the bond rating company says that the industry has generally a stable outlook in a six-month update of that report released today, it notes that worsening economic conditions could lead to trouble, particularly for small private colleges that draw locally, local community colleges, and regional or less-selective public institutions.

"We have seen a lot of these broad challenges before, but it is somewhat unique that so many are hitting us at the same time, and in some cases they are heavier or stronger challenges than they have been in the past," said Roger Goodman, a Moody's vice president and the report's author.

Higher education has gone through similar economic cycles before and come out fine. But in this cycle, "you have multiple sources of tuition payments for families being hit at the same time," Mr. Goodman said. "Home equity is declining, even if it still exists. You have general-economy job losses, and you have the student-loan challenges."

The report points to several areas of college business that could take a downturn in a worsening economy:

  • Colleges with high tuition may suffer, as families choose less-expensive institutions, and political pressure may build to scrutinize and limit tuition increases.

  • Endowments may weaken and fund-raising campaigns "will likely underperform for the first time in many years."

  • State support will probably weaken.

  • Colleges with variable-rate debt may feel more pressure as rates go up.

  • Higher education has an "extremely resilient business model" with multiple sources of revenue and capital, inelastic demand, and "a seemingly unlimited willingness among parents and students to pay for higher education as a long-term investment in personal growth and career opportunity," the report says. Those qualities insulate the education market from factors that can deteriorate other sectors, like health care, it says.

    But there is nevertheless a shift toward lower-cost options. The price of fuel may also influence students' decisions about whether to attend a residential college or a commuter school, but not in the way people might expect. Even with high fuel costs, students might choose to live at home and attend a commuter school to save money rather than attend a far-off residential university.

    The report, "U.S. Higher Education Outlook: Six-Month Update," is available online today for Moody's subscribers.