The coronavirus pandemic has exposed various market bubbles that exist in the US economy, and as infection rates continue to soar, the likelihood of those bubbles bursting increases with each passing day. One of those bubbles that is being relatively overlooked is in the higher education industry, which has recently been dealt some significant blows as a result of the pandemic crisis.
According to a recent report by the National Student Clearinghouse Research Center (NSCRC), freshman enrolment fell by a staggering 16.1% compared to fall 2019, which has been predominantly fueled by the drop in international students. This has lead to significant revenue losses across the entire higher education industry, with some colleges even having to shut down operations. However, with the government’s failure at getting the pandemic under control as the second wave sets in across the US, many universities and colleges will have no choice but to revert to virtual education for the time being – which could prove to be the final prick for the student housing debt market bubble.
Over the last several years, the student debt bubble has grown to a staggering $1.6 trillion, which up until a global pandemic, was not forecasted to crash anytime soon. Credit rating agency Moody’s however recently downgraded America’s higher education sector from stable to negative, while the American Council on Education forecasts universities and colleges across the country will see a $23 billion revenue reduction by next year.
In the meantime, Bloomberg had recently brought attention to the increasing number of empty college and university dorms, which have been left vacant due to virtual education options for students. This in turn has put added pressure onto the colleges and universities, which are now being asked to dip into their severely-suppressed revenues to help investors in the $14 billion student housing debt market.
With significant reductions in student enrolment and a resulting lack of demand for student dorms, revenue streams for the colleges and universities that are already over-leveraged beyond their means are drying up. In a typical scenario, privatized student housing debt would be paid off via the revenue generated from the dorms, but if the financial situation sours, then there is very little recourse for bondholders. Thus, with dorm occupancies falling as fast as coronavirus cases are rising, 2021 could turn out to be a very bad year for many post-secondary institutions.
According to Moody’s, privatized dorms are being impacted the most amid pandemic-related vacancy rates. Given that these dorms were not financially structured to withstand 20% to 30% occupancy reductions, the universities and colleges may have to dip into their own revenues to help the student housing bonds that are at risk of violating their debt service coverage ratio.
The residence hall at West Virginia State University for example, which costs approximately $3,881 per semester is only 71% occupied this fall; however, dorms need to be at least 92% occupied in order for the university to meet debt obligations. According to the president of the university foundation that sold the debt, Patricia Schumann, the university is now expected to make a $75,000 payment come January, despite the school’s already-deteriorating financial position.
Likewise, it is much the same situation at the Terra State Community College in Ohio. The college, which has over 2,100 students, was recently downgraded to junk status due to the increased risk posed by a dorm owned by a nonprofit company. As a result of the pandemic, the college’s dorm occupancy level dropped to 62%, and now the school has no choice but to allocate a previous donation to cover a projected revenue shortcoming that could cost anywhere between $500,000 to $600,000.
In short, dropping enrolment levels, coupled with falling student housing occupancy rates at colleges and universities that are already severely over-leveraged, make for a debt bubble just waiting to burst. As a result, these post-secondary institutions are scrambling to divert enough revenue to cover service debts, given that regular income streams are nowhere to be found amid a plethora of students taking virtual classes from the comfort of their parents’ basements.
Information for this briefing was found via the NSCRC, Moody’s, and Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.