Moody’s Ratings on Tuesday downgraded its outlook for the higher education sector from stable to negative due to recent and potential federal policy changes.
The revised outlook comes as the Trump administration has gutted the Education Department via mass layoffs and sought to aggressively overhaul higher education with a flurry of executive orders that have destabilized certain funding streams.
“Actions and potential changes include cuts to research funding, enforcement actions against diversity programs, staff reductions at the US Department of Education, uncertainty over federal student aid, and possible expanded taxes on endowments,” Moody’s analysts wrote in the report released Tuesday. “These factors are causing institutions to pause capital investments, freeze hiring, and cut spending.”
In December, Moody’s projected a stable 2025 with anticipated revenue growth of 4 percent—the most optimistic outlooks for the sector among a trio of predictions from key financial organizations. Now the ratings agency notes federal policy changes could prompt revenue shortfalls, particularly at research universities, due to a proposed cap on National Institutes of Health reimbursements for research-related costs. That cap, which is currently blocked by a court order, would mean about $100 million in cuts annually for research universities that spend at least $50 million on research and award 70 research doctorates a year, according to Moody’s.
In addition to the NIH rate cut, an increase to the endowment tax would hit wealthy, private universities and likely drive cuts to financial aid or in other spending categories, the report found. The current endowment tax is 1.4 percent for institutions with at least 500 students and $500,000 in assets per student, but recent Republican proposals have floated raising that tax significantly. One proposal has called for a 10 percent tax and changing the per-student endowment threshold from $500,000 to $200,000. Another GOP proposal would set the tax at 21 percent.
Potential disruptions to federal financial aid disbursement, however, would impact all colleges and universities. Moody’s noted that “only a select group of wealthy institutions have the financial flexibility to manage such a scenario without likely seeing steep enrollment decline.” Given steep cuts to the Education Department, Moody’s expressed concern that the Federal Student Aid office could be affected, particularly after last year’s overhaul of the Free Application for Federal Student Aid, which was beset by multiple technical challenges.
“The administration has said the reductions will not affect the department’s statutorily mandated functions such as administering Title IV financial aid and providing assistance to federal student loan borrowers, but the extent to which that will be the case is uncertain,” the report noted.
Federal enforcement actions against diversity, equity and inclusion initiatives—which the Trump administration has targeted—also pose a financial risk to the sector, according to Moody’s. The report cited the potential for “a wide array of funding cuts, including Title IV funding suspension, if [universities] do not comply” with Trump’s executive orders clamping down on DEI offerings.
Moody’s also flagged potential losses due to the possible reduction in visas for foreign students. Colleges and universities that would be hit the hardest, according to the report, are those that are “reliant on STEM master’s programs, or more niche offerings like art and design programs.”
The report concluded that the outlook could revert to stable “if many of the federal policies and proposals are reversed or halted by judicial intervention or do not come to pass. Stronger-than-expected investment market returns and operating revenue growth could also lead to a revision of the outlook to stable.”
