Higher Education: Focus on Demographics and Leadership | Lord Abbett

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Fixed-Income Insights

The higher education bond sector is facing some headwinds. Learn more about two developments that will likely shape this sector in 2019.

This article is from the second-quarter 2019 edition of The Muni Quarterly.

Although the leading higher education institutions continue to perform well and remain competitive, we see some challenges with lower rated higher education bonds.  Demographic changes continue to shape the future for many institutions of learning and public concerns grow around affordability and high profile scandals.  

Following are five of the broader credit themes that are guiding our continued participation in higher education deals for 2019:

  1. strength and stability among large and established institutions, contrasted with accelerating challenges experienced by small, tuition-dependent regional institutions. Private universities in areas with declining demographics will experience heightened pressure.
  2. continued declines in international students, which historically have been a profitable part of universities’ cohorts;
  3. robust giving trends, though the spoils of giving are unequally distributed, with 33% of schools receiving 80% of gifts;
  4. continued concern about affordability, although institutions are currently raising tuition and fees by the smallest average  percentage since 1980; and
  5. the continued prominence of the four-year degree as the preferred credential  of U.S. employers, according to a Pew study.

In this outlook we explore two developments that framed the discussion of higher education credit in 2018 and that we believe will persist into 2019.

Assessing and Quantifying Future Demographic Change
Ongoing demographic change and expectations for future enrollment declines are having a strong impact on the industry, with university leaders being forced to confront the likelihood that their historical enrollment base of recent high school graduates may materially shrink over the medium-term.

In his book “Demographics and the Demand for Higher Education,” Nathan Grawe argues that changes to fertility rates, regional migration patterns, and immigration are driving people away from Midwestern and Northeastern states, leading to declines in the number of high school graduates beyond national trends. He expects this phenomenon to accelerate after 2025 (see Figure 1).

The credit impact here is clear: non-market-leading universities in these areas will be forced to innovate (through mergers, aggressive budget maneuvers, increased enrollment of non-traditional students, and programmatic changes) and may see material and permanent reductions in credit quality.

We will continue to invest in a forward-thinking way to account for pockets of the industry we believe will fare worst in this changing environment.


High-School Graduation Rates Expected to Decline in Key Regions
Total public and private high school graduates for selected U.S. regions, 2013–2029

Source: Nathan Grawe, Demographics and the Demand for Higher Education, Johns Hopkins University Press (January 1, 2018).


Regulatory and Public Policy Changes
In our outlook last year, we expressed both concern and optimism for regulatory and policy change within the higher education sector. Most of the proposals we discussed did not come to pass, and we remain skeptical that substantial reform will occur in 2019 despite recent news out of Congress and the White House.

We believe tax reform will continue to remain a non-factor as long as current economic conditions persist. The increase to the standard deduction did not dampen enthusiasm for giving, which rose 7% in fiscal 2018. Additionally, the new 1.4% tax on large endowments only affected around 30 especially wealthy colleges with substantial capacity to pay.

Partisan gridlock continues to stall the reauthorization of the Higher Education Act, which is the piece of federal legislation that authorizes and regulates most student assistance programs. While the Act historically has seen regular reauthorization, Congress has not passed a new HEA since 2008.  Recent reports indicate that the Senate Committee on Health, Education, Labor, and Pensions remains split on key issues that would likely be addressed by the final legislation, such as accreditation and Title IX enforcement.

At the state and institution level, we believe growing public concerns around affordability and high profile scandals have led to increased scrutiny of university leadership from boards of trustees and state regulators. This influenced an above-average number of chancellor departures in 2018. While leadership transition can be disruptive, experienced higher education executives have stepped into many of these vacated roles, maintaining continuity and reducing the potential negative credit impact.

Our understanding of evolving credit conditions in all these matters will inform our investment decisions going forward in 2019.



About The Author


The Second Quarter 2019 edition offers insights from our analysts on key topics for municipal bond investors, along with essential market information.


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