Inflation and labor shortages set to squeeze college budgets, Moody’s says

Higher Ed Dive

Rick Seltzer

April 13, 2022

Dive Brief:

• Colleges face their highest expense growth in over a decade as rising costs combine with wage inflation, labor shortages and a push to hire, according to two new reports issued this week by Moody’s Investors Service.

• At the same time, volatility has returned to the investment market, and recent public funding increases are waning, Moody’s said. Colleges also face mounting enrollment uncertainty that raises risks for tuition-dependent institutions that lack a national brand and deep pockets.

• Most of the U.S. higher education sector will remain financially stable in the near term thanks to strong endowment values and liquidity levels that grew recently, the reports said. But Moody’s analysts expect the converging pressures to squeeze many colleges’ budgets in fiscal 2023 and beyond.

Dive Insight:

Bond ratings agencies’ periodic reports can offer insight and perspective on the higher ed market’s financial performance and underlying characteristics. Moody’s rates institutions that tend to be stronger financially than the U.S. higher ed sector as a whole, but it still tracks a range of factors affecting colleges of all sizes and types.

Its analysts expect colleges to experience median annual expense growth of 4% to 6% for the second straight year, driven by labor costs. That’s substantially greater than the typical increase over the last 10 years, which was 3% to 4%.

The tight labor market doesn’t merely drive up colleges’ costs. It contributes to enrollment uncertainty and, by extension, to unclear revenue prospects. That’s because rising wages and a low unemployment rate can convince high school graduates and those who might go back to college to instead seek work.

Community colleges in particular are exposed to this dynamic, although graduate programs could also see enrollment slow if the labor market remains good for job seekers, Moody’s found. Community colleges already bore the brunt of pandemic-era enrollment declines.

At the same time, inflation hits low-income households — and the students who come from them — hardest. Higher prices for necessary expenses like food and transportation mean less discretionary income to spend on priorities like tuition, Moody’s noted.

Signs indicate declines will continue at some of the same public and private colleges that already saw years of enrollment decreases, according to Moody’s.

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