July 3, 2014 / 1:22 PM / 4 years ago

RPT-Fitch: Increased Discounting Dims Revenue Growth Prospects at Some Private Colleges & Universities

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July 3 (Reuters) - (The following statement was released by the rating agency)

The continued increase in freshmen and undergraduate tuition discounting represents a credit risk for some private institutions of higher education, according to Fitch Ratings.

A recent report by the National Association of College and University Business Officers (NACUBO) showed that the tuition discount rate, which represents institutional grant dollars as a share of gross tuition and fee revenue, continued to creep up for the first-time for freshmen and undergraduate students in fiscal 2014.

Fitch believes such increases may put pressure on an institution’s ability to grow net tuition and fees, which is the primary revenue stream for many private colleges and universities, particularly those in the ‘A’ category and below. Financial aid is less of a credit factor for public colleges and universities than it is for private colleges and universities, due to the lower overall tuition and fee charges and predominant use of state and federal funds for scholarships.

According to the NACUBO report, which conducted an annual survey of private nonprofit, four-year colleges and universities, the average discount rate for first-time, full-time freshmen reached an estimated 46.4% in fiscal 2014 (academic year 2013-14), up from 44.8% in the prior year and 39.9% in fiscal 2009. Similarly, the average discount rate for all undergraduates also crept up, to an estimated 40.9% in fiscal 2014 from 40.2% in the preceding year and 36.1% in fiscal 2009.

Both of the estimated discounting figures in fiscal 2014 are reported by NACUBO as record highs and represent continued challenges at private colleges and universities, which already struggle with price-sensitive households and increased competition for students due to a decreasing number of high school graduates nationwide.

Further, increased discounting for all undergraduates in recent years was likely influenced by the need to allocate additional funds toward student retention due to the reduction in the amount of semesters (from 18 to 12) that a student can remain eligible for the Federal Pell Grant (effective July 1, 2012 or fiscal 2013 for most private colleges and universities).

Fitch recognizes that increased tuition discounting is sometimes a component of a ‘high tuition- high aid’ business strategy at some private colleges and universities. Under this model, increased discounting is expected to be accompanied by higher tuition charges to accommodate continued growth in net student fee revenues. However, increased public scrutiny of tuition hikes in recent years has weakened the pricing power of many private colleges and universities, which for some has resulted in a situation where net student revenue from tuition and fees is either flat or receding.

Fitch notes that well-endowed private colleges and universities, which are typically in the ‘AA’ and ‘AAA’ rating categories, remain well-positioned to withstand aid-related pressures, as a significant portion of institutional aid is funded through endowments and annual giving. Further, a family’s willingness to pay tuition at most of these institutions remains intact given the reputational clout of most of the institutions in those rating categories.

Conversely, many less-wealthy private colleges and universities, which are typically smaller and regional in operating scope, are experiencing a situation where limited prospects for revenue enhancement and increased financial aid is potentially pressuring finances and crowds out spending in other strategic priorities. Fitch notes that these institutions are likely to see their market position weaken over time, which may drive downward rating pressure.

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