Early Signs of US Colleges Losing Pricing Power

Moody’s Investors Service reports one-third of colleges expect falling or flat net tuition revenue due to years of depressed family income and wealth, in addition to uncertain job prospects for many recent graduates result in softening demand at current tuition levels. To make college more attractive to families affected by declining income and wealth, colleges are increasing aid, but the strategy is reducing net tuition revenue (tuition - aid = net tuition revenue). College officials need net tuition increases to keep up with rising expenses. It’s interesting to note that the cost of attending public colleges is rising faster than the cost of private colleges, due to reduced state aid to public universities over the last few years. Yet attending a public college like the University of Washington is still only one third of the cost of a private institution like the University of Southern California. Moreover, the impact of the recession has created a more uncertain job market for recent grads and Moody’s notes a “heightened scrutiny of the value of higher education.” What this means is students are becoming more informed about the real cost of a college education and are analyzing the alternatives. We see one alternative to a traditional four-year college path is attending a more affordable community college program and then transferring to a traditional college to reduce overall education costs. Community colleges have been a favorite sector of SNW, and we are well aware of the pressures on organizations to balance the demand with available resources. In the end, US four-year colleges could be at an inflection point in net tuition revenue growth, which could be a longer term credit negative and an important trend to watch over the next several years.