The higher education sector faces mounting financial challenges in fiscal year 2026, according to a recent report from Moody's Ratings that downgraded the industry's outlook from stable to negative.
The ratings agency cited a confluence of pressures threatening institutional finances: declining high school graduate populations, rising operational costs, and significant federal policy changes under the Trump administration that have reshaped the landscape for colleges and universities.
"Federal policy and a shrinking population of high school graduates create an increasingly difficult and shifting operating environment for colleges and universities," Moody's analysts wrote in their report.
The Trump administration has implemented sweeping changes affecting higher education since taking office, including restrictions on research funding, expanded investigations into campus antisemitism, tighter immigration policies affecting international students, and proposals for higher endowment taxes. A Republican spending bill passed over the summer introduced major policy shifts, while the administration has moved to restructure the Department of Education and impose operational changes on institutions.
Among the most significant concerns, according to Moody's, are changes to federal student loan programs. Beginning next year, the government will phase out the Grad PLUS loan program, which currently allows graduate students to borrow up to their full cost of attendance. New borrowing caps will limit most graduate students to $100,000 in federal loans, with a $200,000 ceiling for professional programs like medical school.
"Institutions with large master's degree offerings will be particularly vulnerable to shifts in student demand if prospective students are not able to fully access the private loan market," the analysts warned.
These policy challenges compound existing demographic pressures. The national population of high school graduates is projected to begin declining next year, constraining enrollment growth and revenue increases for institutions already operating on thin margins.
Moody's projects overall revenue growth of 3.5% for the sector in 2026, down from 3.8% in 2025. Smaller institutions face even tighter projections—2.5% growth for small public colleges and 2.7% for small private institutions.
Meanwhile, expenses are expected to grow 4.4%, creating a widening gap despite more modest inflation compared to this year's 5.2% increase.
The financial squeeze is particularly acute for private colleges. Moody's forecasts that 16% of private institutions will operate with negative earnings margins in 2026, up from an estimated 12.2% this year and 7.2% in 2024.
"Given the strained revenue forecast, management's ability to control costs and identify creative operational efficiencies will take on even greater importance even at the largest and wealthiest institutions," the analysts noted.
The report suggests institutions may turn to early retirement buyouts, workforce reductions, benefit cuts, shared services arrangements, and mergers to address what Moody's described as "fundamental business model weakness."
