Debt payments at risk for colleges where auxiliary income takes a hit, Moody’s says

Dive Brief: 

• Colleges that rely heavily on auxiliary income from sources such as housing and dining and have fewer students on campus this fall are at greater risk of losing money than schools with a wider income base, explains a new Moody’s Investors Service report.

• Institutions that used debt to finance auxiliary facilities may struggle to make payments if revenue from those sources significantly declines, the analysts wrote. However, many schools can tap their reserves or reduce expenses to offset some of the decrease. 

• The report highlights the pandemic’s financial toll on colleges, many of which have had to invest in campus modifications and online education as they’re losing out on key revenue. 

Dive Insight: 

Colleges stand to lose money across several auxiliary sources this academic year, including housing, athletics, dining, recreational facilities and parking. 

Four-year public institutions generally rely less on these income sources than their private counterparts in part because they can count on state appropriations to make up a share of their budgets. Moreover, only about one-third of students attending four-year publics live on campus, compared to more than half of students at four-year private institutions, the report explains. 

Yet there is considerable variation in reliance on auxiliary income among institution types, the report notes. Wheaton College, a private liberal arts school in Massachusetts, depends on auxiliaries for around 30% of its operating revenue, while nearby Tufts University, another private institution, relies on those income sources for just 6% of its budget, the report notes. 

Greater reliance on housing and other auxiliary revenue raises the stakes for the fall term. Several colleges are reporting coronavirus outbreaks after bringing students back for in-person instruction, and some are opting to switch to remote instruction and even send students home. 

The University of North Carolina at Chapel Hill, for instance, switched to virtual classes after only one week of campus-based instruction. Officials also told students they could cancel their campus housing without penalty, potentially forgoing a large chunk of revenue. 

Several public and private institutions have since followed suit. Among those is Colorado College, which is moving classes online after the county health department required the private institution to quarantine entire residence halls and told it to expect similar actions throughout the term. 

“[W]e can’t offer a quality residential experience to our students under these circumstances,” Colorado College’s acting co-presidents wrote in a letter to the campus, adding that they would “significantly reduce” the number of students in the residence halls. 

Other institutions started out the academic year with fewer students living on campus than normally would by housing students one to a room and designating space for quarantining those who catch the coronavirus or are awaiting test results. 

In some cases, schools that bring in substantially less revenue could breach their debt covenants, which could require them to bring in a consultant or even allow the lender to request they repay the entire outstanding loan. 

“Careful treasury management and knowledge of specific provisions of bond documents are therefore of paramount importance,” the analysts wrote. 

Colleges have several tools at their disposal, however. The State University of New York, which projected as much as a $400 million operating loss in the 2020 fiscal year, recently refinanced its scheduled principal and interest payments due in the 2021 and 2022 fiscal years on debt repaid by housing revenue, the report notes.