Fitch, the ratings provider and analyst, recently reported in its “U.S. Higher Education Outlook 2025” that the sector was “deteriorating,” when compared to recent years.
But as is often the case, if you just read the headline, you won’t get the complete picture. That picture, even according to Fitch, is not nearly as bad as many people would like to assume.
While it is undeniable that America’s vital higher education sector is not currently basking in a honeymoon of popularity, demand, and funding – it’s not nearly so bad either. That is pretty clear if you read past the first word of the new report or consult other sources.
But first, it’s important to keep in mind that what Fitch published is an outlook, an educated guess about the future. And when it comes to higher education guesses, ratings shops have been wrong, and often.
Fitch, in its opening paragraph, writes, “Public funding has flattened as states return to normalized budgetary means following the pandemic, and net tuition growth prospects are modest at best. This revenue trajectory is unlikely to be sufficient to fully offset still elevated labor and wage costs, rising capital needs and a sharply uncertain legislative landscape.”
Translated, the budget pressures that Fitch expects to continue squeezing higher education are coming from rising costs and stagnant public support and not necessarily from market retraction. Maybe it does not matter. A squeeze is a squeeze. But if you’re a business and your product is still selling while your taxes and fixed costs go up, that’s a different problem than not being able to move product.
Translated again, but shorter – higher education’s market pressures are not highly related to the sector’s value proposition.
And while the Fitch report is full of warnings about budget limitations, fundraising restraints, volatility, and changes in tax treatment, it still says, “For Fitch’s rated portfolio, the predominant Rating Outlook remains Stable and widespread downgrades are not anticipated.”
Fitch also repeats, “Material stabilization in operating costs, including a meaningful easing of labor and benefit costs, could contribute to a reversion in the sector outlook to neutral.” In other words, the cost of labor and benefits at colleges and universities is a – perhaps even the – real problem.
If the premise is correct that payroll and benefits costs are starting to strangle higher education providers, the first step in restoring free breathing is knowing what’s choking you. Whether they can, or will, do anything about it is another matter.
Fitch continues, “While overall undergraduate enrollment has stabilized somewhat post-COVID, the freshman enrollment pipeline has declined particularly for four-year schools. Likely a combination of factors including the botched FAFSA rollout and wider softness in college-going rates, the freshman pipeline is likely to remain pressured in the coming year.”
The key words in that paragraph are “stabilized somewhat” and “botched FAFSA rollout.” Yes, though you’d be hard-pressed to know it without digging, college enrollment is actually up year over year, even with a decline among freshmen. And if the freshmen dip is related to the FAFSA debacle, which it probably is, then many of last-year’s college aspirants will come back. Not all, but many. Which means, much like the post-Covid enrollment bounce, this dip may at least partly reverse pretty quickly.
The outlook report correctly assesses wide uncertainty in the crucial international student market, “Following a strong year for total enrollment in 2023, the international student landscape remains fragile. New international student enrollment has been flat for the past two years, and that student group remains highly susceptible to unfavorable shifts in both geopolitical sentiment and policy.” Trump, in other words. The return of Trump to the White House will likely depress interest in studying in America, earning a degree here.
Fitch also reports, “For the 2024-2025 academic year, Fitch is expecting mild growth in net tuition of 2%-4% for most rated institutions.” You may have to read that again to fully absorb that net tuition – profit – is expected to see “mild growth” in 2025. Which means, again, that not only are higher education’s products selling, profit margins are moving upwards. Modestly, yes. But in the same business context, if your wares are selling and your profit is increasing, most other challenges are addressable.
Reinforcing the point, the report also says, “Local and regional enrollment nuances will become more important than sector wide trends.” That’s true. Whatever enrollment, revenue, or other pressures are falling on colleges, they are much more likely to reflect particular or peculiar regional conditions than unearth some broad status or trend of higher education overall.
Just this week, for example, the University of Texas, at Austin announced, “Demand Soars as UT Shatters Record for Freshman Applications.” The school’s press release also noted, “This marks the third consecutive year UT has received a record-breaking volume of freshman applications.” The sector may have pockets of despair, but there’s also plenty of sunshine.
Finally, the report notes that many schools may be forced into substantial outlays for delayed infrastructure on their campuses. There’s no reason to doubt that, as the past five years have probably not felt like the best time to spend.
Either way, any outlook on higher education next year cannot be faulted for caution or even pessimism, though it’s likely driven far more by uncertainty than the status of the marketplace itself. Even those who use words such as “deteriorating” also conclude that enrollment is stable, net tuition revenue is up, and problems tend to be both regional and driven by factors such as rising cost – not demand or value calculations. If you care about such things, that’s rather reassuring.