In a post on social media, a friend lamented that her daughter’s classmate, a brilliant young scientist at MIT who went home to Iran over the winter break, could not get back into the country to start her spring semester due to Trump’s executive order banning entry of people from seven countries. Similar scenarios are playing out across the country and in various sectors of the economy. Students from the seven targeted countries may now avoid leaving the US for fear of not being able to return to their studies.
US higher education has benefitted from a strong influx of international students. Higher education is an extremely competitive sector and international in nature. Universities around the globe are trying to attract international students in order to achieve diversity in all aspects of their operations, including revenue diversity. The number of international students in the US has grown 70% over the past decade to a level of 5% of total enrollment, or over one million students.
Student-related fees and charges account for 42% of the revenue of public systems and 75% of that of private systems. International enrollment in the US is concentrated in large urban and research universities. International and out-of-state students generally pay full out-of-state tuition and in some cases pay it in full and up-front. Thus many institutions, especially private ones in urban settings and those that are research-oriented, would be significantly affected by a drop-off in international enrollment. The highly rated, more competitive universities are those most likely to withstand a decline in enrollment, but they too will be hurt. The ban could also affect the demand for private preparatory schools in the US, which have a foreign-student component.
According to Moody’s, “Even if a challenging policy is reversed within a year, it typically takes three to four years to make up the financial loss from a reversal in policy.” The ban may not have an immediate effect on the finances of universities, unless there are expenses to aid displaced students; but it will have negative ramifications for these and other institutions in the long run if foreign students reconsider coming to the US for their education.
Higher education management in the US has to be nimble to attract and retain students and to accommodate changes in state and federal grant funding, pension funding, and endowment management. Institutions have been stressed for years as even public universities have vied for increased tuition and fee revenue to support operations and to insulate themselves from changes in state policies and financial conditions.
A number of years ago, Cumberland reduced its exposure to the education sector due to demographic issues and remains invested only in higher-quality, diversified schools and systems. We will continue to monitor the Trump administration’s actions and how they may affect our holdings. As interest rates rise and credit spreads widen, our policy of investing in higher-quality bonds remains tantamount.
It is heartening to see citizens and the judicial branch of our government taking quick action to rectify a controversial and questionable executive order. We at Cumberland Advisors hope that the executive and legislative branches of government can come together quickly and in a constructive fashion to set a policy that reflects our nation’s values while preserving funding sources for our country’s universities.
