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Three predictions about the future of higher education

Northeastern University’s campus in Boston, Mass. Moody’s gave the school a “positive outlook” based in part on its “revenue diversification” attributed to the university’s expansion in research buildings and faculty. (Courtesy of Northeastern University.)

Several new ratings reports from Moody’s Investor Service that landed in my e-mail inbox this week give plenty of clues about where higher education is headed in the United States.

Moody’s examines the finances of more than 500 colleges and universities that issue debt through the public markets. While some might place little trust in the analyses of Moody’s or the other major bond-rating agencies after they were so wrong about the 2008 housing crisis, in higher education the ratings still provide a good indicator of the strengths and weaknesses of colleges and universities.

From reading just these three most recent ratings actions from Moody’s, here’s what you can learn about the future of higher education.

1. Law schools are in deep trouble. Moody’s downgraded the California Western School of Law and gave the free-standing private law school in San Diego a “negative outlook,” adding that its financial pressures are “likely to continue for a period longer than expected.”

California Western is not alone in its struggles. Fewer students are going to law school and fewer graduates are obtaining the jobs that they went to law school to get.

During the past decade, the number of law schools increased by 9 percent, to 204, according to Moody’s, while the number of new students hit its lowest number since 1973, when there were just 151 law schools.

What’s more, the American Bar Association, which collects data on job placement, found that for the Class of 2014, just 60 percent were employed in long-term, full-time positions that require them to pass the bar nine months after graduation.

“The legal industry is experiencing a fundamental shift rather than a cyclical trend,” Moody’s said in a recent report about law schools.

But it seems everyone is aware of the changing (and depressed) job market for lawyers except for the people running law schools. Even as the prospects for legal education grew dimmer in recent years, American University continued to push forward on a massive new $130 million law school complex at Tenley Circle in Washington, D.C., which recently opened to students.

2. The strongest universities are those that depend on more than just students for their revenue. Moody’s gave Northeastern University a “positive outlook” based in part on its “revenue diversification” attributed to the university’s expansion in research buildings and faculty.

There is much discussion these days about whether colleges and universities need to “unbundle” their operations to lower their prices instead of being all things to all people. One argument in favor of unbundling is whether universities should be in the business of teaching undergraduates and conducting research.

But if schools are only in the business of teaching students — which is the case at most small private colleges — they are heavily dependent on student tuition dollars to sustain their operations. Elite liberal-arts colleges, like Williams and Amherst, have big endowments to help their bottom lines, but most institutions are not so lucky. As student and families struggle to pay tuition bills, schools will need other revenue streams beyond undergraduates.

That’s one reason why instead of unbundling research from teaching, many schools might move in the opposite direction, like Northeastern, and double down on their research efforts to attract new dollars.

3. States might be getting out of the business of higher education, but most public institutions still depend on taxpayer dollars. The third ratings action was for the University of Illinois, which received a “negative outlook” for some of its bonds.

While Moody’s noted that the university itself is in strong financial shape and continues to be popular among students, it remains dependent on the state for one-third of its operating budget. And in case you haven’t heard, Illinois still doesn’t have a state budget, dating back to the beginning of its fiscal year in July.

There’s been much debate in recent years about the role of public colleges in an era when students pay for more than half their education in most states. Sure, state funds might make up less than 10 percent of the budget at the University of Virginia, the University of Michigan, and Berkeley, but the fact of the matter is that most public colleges couldn’t survive if not for their states.

You only need to look through these few ratings actions by Moody’s to get a sense of the enormous challenges facing higher education. In this election year, one of the things about which candidates on both sides agree is that higher education is in need of change. Now the question is whether their solutions will be tackling the right problems.