In this piece, we provide a "101" on the types of municipal bonds and give a credit perspective on the various parts of the market.
For decades, colleges and universities benefited from increases in tuition-paying high school graduates. However, changing U.S. demographics have been altering this trend. High-school-age population growth is now retreating, and the socioeconomic composition of first-year college classes is rapidly diversifying. These demographic shifts may slow tuition growth and stress elements of university operating budgets. However, colleges and universities can proactively adapt to the new environment and enhance their credit fundamentals. As we have outlined before in the context of K-12 public schools, more-inclusive education systems can benefit schools, students and broader communities (see: Grading Inclusiveness in Public School Districts). The higher education space is likely no different.
The Shifting Landscape of College Enrollees
Colleges and universities face a new enrollee environment, marked by the following:
- Slowing Growth in High-School-Age Population. In North America, the proportion of people 60+ has grown on average 3 percent annually from 2010 to 2015, versus 0.3 percent for those 15-59, and -0.2 percent for those 0-14.1 Due partly to these birth rates, the number of high school graduates grew significantly in the early 2000s, but growth has since slowed, and the pipeline is expected to fall in the next decade (Figure 1).
- More Racial Diversity. Minority students now compose more than 40 percent of college enrollees, up from 25 percent in 1995. This percentage is expected to reach 47 percent in 2026.2
- Higher Proportion of Lower-Income Students. In 2000, just under 50 percent of lower-income high school graduates were enrolled in college. That number rose to 65 percent in 2016 (projected).3
- First-Generation Students a Large Proportion of Enrollees. First-generation students represent roughly one-third of students enrolled in post-secondary institutions. However, this is down from 37% in 1999-2000.4
Left unaddressed, the demographic shifts listed above would likely weaken credit fundamentals in the higher education space. A shrinking pool of high school graduates is likely to translate into reduced tuition revenue at many schools. Growth in the number of lower-income and first-generation students is also likely to pressure tuition revenue due to the higher price sensitivity of these students.
On the expenditure side, there is recognition that colleges and universities may need to provide additional support services to ensure minority and first-generation students feel included on modern college campuses. Research indicates that first-generation and minority students have lower retention and success rates than peers.5 6
These credit challenges are in addition to more traditional concerns. The higher education sector is facing headwinds that include growing infrastructure needs and an uncertain federal funding landscape.
Over the coming decade, meaningfully increasing tuition and fees, the largest revenue stream for universities, will likely prove challenging given the demographic trends outlined earlier. Hiking tuition and fees threatens to create a barrier to entry for lower-income or first-generation students. With the heightened scrutiny of the cost versus the value of higher education, universities will need to strike a balance between increasing tuition and expanding their prospective student pool. Tuition and fees have already increased 3.1 times and 2.3 times at public and private colleges, respectively, between 1988 and 2018, after adjusting for inflation.7
How Higher Ed is Adapting: Credit Views
Fortunately, outside of tuition hikes or expenditure management, there is much higher education providers can do to adapt to the changing student body landscape. Colleges and universities are taking the following steps to succeed in an era of quickly changing demographics:
- Increasing access to nontraditional students. To diversify their tuition bases, some universities have sought to increase enrollment among nontraditional students such as older students already in the workforce, international students and transfer students. Other schools are specifically targeting lower-income students despite affordability challenges. These institutions realize the inevitable importance of gaining ground with lower-income students because of the overall demographic shifts in the U.S. In addition, reaching out to lower-income populations has a positive branding effect. An established commitment to inclusiveness is often attractive to potential students, donors, community members and other stakeholders. Through the American Talent Initiative, over 100 universities have pledged to increase admissions to lower-income students.
- Partnering with Other Schools. Partnerships can create an affordable path to college for some students. For example, a student could pay for two years at a community college, pay for another two years at a public or private university and still end up with a degree from the 4-year institution at a significantly reduced overall cost. Schools with partnership programs in place may prove better positioned to market to the incoming population of students. Notably, partnerships attract many students who receive financial aid through well supported community-college-to-university state aid programs.
- Specializing. Higher education providers can seek to specialize in specific subject areas that prepare students for jobs in growing sectors of the economy. With students and parents increasingly focused on post-graduation job placement and return on investment (“ROI”), this strategy can improve a university’s brand and convey a more compelling value proposition, leading to enhanced pricing power. Moody’s notes that “…colleges with STEM, health sciences and practical art and design programs are experiencing strong revenue growth.”8
- Offering More Online Courses. Online learning programs can expand the geographic reach of a university and allow more flexibility for nontraditional students, particularly working students, students with dependents or those with transportation difficulties. Online learning also creates the opportunity for personalized or individualized learning and monitoring, thereby increasing retention.
The Future is Now
Breckinridge’s approach to analyzing college and university bonds includes an assessment of environmental, social and governance (ESG) criteria. We believe this approach helps us identify campuses that are proactively addressing changing demographics. The schools that find ways to appeal to today’s high school graduates will be best positioned to capture the bulk of enrollment growth over the next decade, in our view.
 United Nations Department of Economic and Social Affairs, Population Division, Profiles of Ageing, 2017.
 NCES, Digest of Education Statistics. Minority students include black, Hispanic, Asian/Pacific Islander, American Indian/Alaska Native, and two or more races. Table prepared March 2017, per the NCES. Actual data available through 2015.
 National Center for Education Statistics, Digest of Education Statistics.
 U.S. Department of Education. Stats in Brief, February 2018. NCES 2018-421.
 National Center for Education Statistics (NCES), “First-Generation Students: College Access, Persistence, and Postbachelor’s Outcomes.” See: https://nces.ed.gov/pubs2018/2018421.pdf.
 Vanessa V. Volpe, M.A. Steve Fund White Paper. “What We Know About the Mental Health of Students of Color during College: A Review and Call to Action”. University of North Carolina at Chapel Hill.
 The College Board.
 Moody’s Investors Service, “Higher Education -- US: Strategic differentiation fosters stronger revenue growth at private universities,” August 2017.
DISCLAIMER: The opinions and views expressed are those of Breckinridge Capital Advisors, Inc. They are current as of the date(s) indicated but are subject to change without notice. Any estimates, targets, and projections are based on Breckinridge research, analysis and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.
Nothing contained herein should be construed or relied upon as financial, legal or tax advice. All investments involve risks, including the loss of principal. An investor should consult with their financial professional before making any investment decisions.
Some information has been taken directly from unaffiliated third party sources. Breckinridge believes such information is reliable, but does not guarantee its accuracy or completeness.
Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.