(Bloomberg) -- The challenging economics of higher education in the US are squeezing the finances of colleges and universities, driving more of them to struggle to pay their debt.
Fifteen institutions have disclosed new technical or payment defaults this year, according to data from Municipal Market Analytics. That’s already just shy of last year’s total of 17, the largest number of impairments — as such events are called — since at least 2009, coming in at more than twice the previous record.
The strains highlight the widening gap between the sector’s haves and have-nots, as stronger universities with large endowments and brand recognition thrive while more regional institutions contend with rising costs and a steep competition for students. Weaker schools recovering from the stress of the pandemic are also facing other pressures, such as student-aid-processing delays.
“The sector has seen a rapid credit erosion since the start of 2023,” Matt Fabian, a partner at MMA, wrote in a note last week.
US colleges and universities have about $246 billion of municipal debt outstanding, data compiled by Bloomberg show. The mounting number of impairments is a result of more, larger universities entering the database and a slow pace of schools resolving their debt problems, MMA said. The overall amount of troubled higher-ed debt has tripled since the end of 2022, according to the research firm.
Schools also face risks outside their core business. A slow recovery in hospitals’ financial performance post-pandemic could hurt the credit rating of schools with academic medical centers. In addition, partnerships with private developers to build graduate housing near campuses present a “modestly riskier credit profile” than a typical housing project, according to Moody’s Ratings.
The rising number of colleges facing challenges still represents a small sliver of the overall market for outstanding higher-ed bonds, and defaults are relatively rare.
“Overall, the credit quality in the sector is pretty high,” said Jim Costello, co-head of the higher-ed group at Jefferies Financial Group Inc. “Generally with schools that are closing, enrollment is under 2,500 students.”
MMA tracks impairments in the municipal bond market, including defaults and events when an issuer uses emergency means to cover debt service, and other issues such as covenant violations.
In June, MMA added Saint Elizabeth University to its database after the school in New Jersey saw its debt-service coverage ratio dip below 1.0 times. The school didn’t respond to an email and phone call seeking comment.
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