“Decimate” might be too charitable a forecast for American higher educational institutions, since the word originated with the Roman army practice of killing one man in ten. Coronavirus is hitting pretty much all of the bad aspects of their business models at once.

Let’s list them:

Dependence on/preference for foreign students, often not for their accomplishments but for their ability to pay full and even premium fees. Chinese students accounted for one-third of the total. Their enrollment was already falling as of 2019.

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But Chinese students’ contribution to revenues is out of proportion to their numbers. From the New York Times in March:

Universities in English-speaking countries, especially Britain, Australia and the United States, have grown increasingly dependent on tuition from Chinese students, a business model that the virus could dismantle.

With qualifying exams postponed, travel bans spreading and anger rising among Chinese students and parents at the West’s permissive attitude toward public health, enrollment could plummet in the coming years, experts said, potentially leaving countries with multibillion- dollar holes in their universities’ budgets.

Foreign students were dismayed by the way US schools shut down abruptly and gave little to no help in helping get them back home.

Skyrocketing prices leading more students to question college or emphasize “practical” degrees. As with mortgages, access to debt has led to higher prices. And with student debt terms so draconian, more and more students are trading down: going to cheaper schools or focusing on programs that teach harder skills that hopefully translate into market value.

Bloated adminispheres and gold plated facilities. MBA parasites have colonized universities, with the justification often that they increase fundraising. For what purpose? To pay themselves better, and to create naming opportunities for donors with new buildings, and to justify high charges via plush dormitories. Apparently swanky gyms are common.

All those expensive buildings have become an albatross.

Now consider the impact of coronavirus.

Litigation over terminating on-campus instruction. This is probably the least of their worries. Plaintiffs are seeking refunds for the degradation of the educational product. The schools argue quite explicitly that they are not in the business of educating but of conferring credentials, and it is they alone that determine what is adequate for them to hand out a degree. There is precedent supporting the universities’ arguments, albeit with less bad facts than these.

Low likelihood of resuming classes on campus this fall. My colleagues with contacts among university administrators say no one has any idea how to make dorms safe if coronavirus is still on the loose. This has many negative implications.

Why should students and/or their parents be willing to pay full prices for a degraded product? They won’t get interaction with instructors. For science and engineering classes, they won’t get lab work. They won’t get to make connections and meet potential mates. They won’t get tips from other students on career and summer job strategies. They won’t get to participate in extracurricular activities, which is a low-stakes way to learn to work with other people. They won’t learn how to grow up in a somewhat protected environment.

There is the very real possibility that employers will downgrade the value of degrees conferred during the plague years.

It’s hard to see how colleges and universities escape cutting tuition, save perhaps the most elite. I can’t see any schools besides the most elite can maintain their charges without seeing a big falloff in enrollment. And with them administering classes remotely, the cost of delivery has fallen. And that’s before seeing students postponing or abandoning degrees due to the horrible state of the economy.

And what happens to university budgets due to the loss of room and board income?

Schools already looking at probable downgrades. Standard & Poors is already put a long list of higher educational institutions on its negative watch list. Bear in mind that S&P and Moody’s tend not to downgrade before Mr. Market already has the bond trading at a lower rating level. From an April 30 Ratings Action:

The public and private colleges and universities affected by these actions include primarily those with lower ratings (‘BBB’ rating category and below), but also those entities that, in our opinion, have less holistic flexibility (from both a market position and financial standpoint) at their current rating level…

While S&P Global Ratings’ outlook on the U.S. not-for-profit higher education sector has been negative for three consecutive years now, we believe that the COVID-19 pandemic and related economic and financial impacts exacerbate pressures already facing colleges and universities. The financial impact on institutions from the loss of auxiliary revenue from housing and dining fees, and parking fees; as well as revenues from athletics, theater, and other events, is material for many. For schools with health care systems, lost revenue from cancelled elective surgical procedures could also be significant. The recently passed CARES Act will provide some budgetary relief to higher education institutions; however, despite this aid, we expect to see stressed operating budgets, the scope of which will ultimately be determined by the magnitude of lost revenues, the duration of the pandemic, fall 2020 mode of instruction, and ultimate enrollment figures.

Colleges and universities have reacted rapidly to the challenges presented by the pandemic. They have moved classes online to adhere to social-distancing rules, adjusted admission policies to accommodate disruptions to high school exams, and suspended academic conferences and travel. At the same time, many have implemented material expense cuts, including deferring capital expenditures, and imposing furloughs and layoffs, in some cases, with plans to continue to ramp up cost containment under various fall scenarios. Many colleges and universities have disclosed estimates of 2020 budget shortfalls, despite the inclusion of CARES stimulus funds. We expect that the colleges and universities we rate will face an unprecedented level of operating stress and tightened liquidity, which will worsen the longer and deeper the pandemic lasts.

It’s bizarre to see S&P depict sports programs as a financial plus; college football programs in fact are money losers and I doubt basketball programs are enough to bring college sports into the black.

It is also not clear how much more help the Federal government will be willing to provide. Even though Congresscritters will be under pressure to help institutions in their district, the flip side is the Republicans know well that higher educational institutions are a Democratic party province, so they won’t be high on their list of rescue priorities.\

This section seems very much behind the curve, as if S&P talks to too many Wall Street types who are betting on a V shaped recovery:

Many of the colleges and universities that we rate have some headroom to absorb the impacts associated with COVID-19 at their current credit ratings, as they have built up reserves over recent years, hold solid balance sheets, and have relatively low debt levels. However, colleges and universities will face increased downward pressure on their current ratings depending on the extent to which economic disruptions associated with COVID-19 persist. If global travel restrictions are prolonged, or the imminent recession diminishes foreign students’ financial means, then some could opt to study or work in their home countries instead. In our opinion, a fall 2020 with significantly fewer international students, as well as lower domestic enrollments overall, will cause serious operational pressures. At the same time, most U.S. colleges and universities depend on endowments and fundraising for a significant portion of revenues, and declining investment performance and endowment market values along with weaker fundraising results could negatively affect credit metrics during the outlook period.

I strongly suggest you look at the list. You’ll see many familiar names. In particular, the ones at the very bottom group, which already had a negative outlook before coronavirus, are the most downgrade exposed. Interestingly, Northwestern, which went to the “hedge fund with a university attached” model early and has an AAA rating, is in that cohort. Did they have an even bigger than typical blow up in their portfolio?

Needless to say, this isn’t cheery reading. While the universities set themselves for a big fall, a lot of people who had nothing to do with the bad policies will get hurt.