SCOTUS admissions ruling means more enrollment pain for higher ed

The recent controversial Supreme Court ruling banning affirmative action may force colleges and universities to boost enrollment with costly outreach programs amid the prospect of chilled interest from nonwhite students who represent the only growing segment of future student demand.  

Ratings analysts said the June 29 SCOTUS ruling itself would not impact ratings – in part because it will affect highly selective, wealthier schools – but over the longer term may prove costly and complicated to schools that want to maintain or create diverse student bodies.

The ruling comes as many colleges and universities already face pressure from enrollment that has failed to rebound to pre-pandemic levels and other headwinds like higher costs and the depletion of federal stimulus support. The higher-ed credit landscape is increasingly bifurcated between stronger and weaker schools, and the SCOTUS ruling may make it tougher for weaker schools to bulk up enrollment, ratings agencies said.

On June 29, the Supreme Court ruled 6-3 that race-based admissions policies at Harvard University and the University of North Carolina at Chapel Hill violate the Equal Protection Clause of the 14^th Amendment as part of two lawsuits brought by Students for Fair Admissions.

The ruling applies to any school that accepts federal funding, though since only the most selective schools tend to use race-based admissions policies — and nine states have already banned the practice — the ruling is expected to apply in practice to roughly 100 schools.

In a June 30 comment, Moody’s Investors Service said the decision “will mainly affect wealthier institutions, which have been the heaviest users of affirmative action to diversity their classes.” The affected institutions typically have strong financial resources to absorb the additional expenses, Moody’s said.

The ruling is expected to apply to race-based scholarships and financial aid as well as admissions.

As a workaround, colleges and universities will likely turn to other options to increase diversity, such as targeted recruitment programs, which can prove costly, and new financial aid and scholarship programs.

A week after the opinion, for example, the University of North Carolina at Chapel Hill announced it would offer a new financial aid program that includes free tuition to in-state students whose families make less than $80,000 a year. The university also said it would hire additional outreach officers for its admissions team.

Fresh scrutiny on other admission policies began immediately after the ruling.

On June 30, Lawyers for Civil Rights filed a civil rights complaint to the federal Department of Education against Harvard for its so-called legacy admissions policy favoring applicants with family ties. President Biden criticized legacy practices as expanding “privilege instead of opportunity,” and Congressional Democrats have said they want to see an end to legacy admissions. Massachusetts lawmakers are considering charging a fee to schools that use legacy preferences, including Harvard.

On the other side of the political spectrum, Missouri Attorney General Andrew Bailey sent a letter the day of the SCOTUS ruling to all the state’s colleges ordering them to implement the ban immediately, including for race-based scholarships and financial aid.

The focus on admission policies comes as enrollment in generally has failed to rebound to pre-pandemic levels, notes S&P Global Ratings, which has a mixed outlook on the sector in part because of enrollment trends.

Fitch Ratings notes that the size of high school graduating classes in the near future is expected to shrink in absolute numbers while becoming more diverse, meaning that nonwhite students will be increasingly important source of higher-ed enrollment.

“Most important for us is the [ruling’s] impact on student demand,” said Fitch Ratings analyst Emily Wadhwani. “What we see in the data going forward is when you look at the high school graduate pipeline, the only meaningful growth we’re going to see in any student demographic is nonwhite students,” Wadhwani said, including Hispanic, Black, students of two or more races and Asian and Asian Pacific students. “The extent to which this ruling discourages college interest from those groups, it has implications across the sector.”

In a commentary, Fitch cited federal data showing that college enrollment rates were lowest among Black, Hispanic and Native American racial/ethnic groups and that over the last decade, the only group with meaningful growth in undergraduate enrollment was Hispanics.

Bans on affirmative action policies have tended to hurt student diversity, argued the University of California and the University of Michigan in a pair of Supreme Court amicus briefs filed in support of affirmative action.

California and Michigan are two of nine states that have affirmative action bans in place, as well as Arizona, Florida, Idaho, Nebraska, New Hampshire, Oklahoma, and Washington. California is the largest state to prohibit the practice, after the 1996 passage of Proposition 209. Michigan passed a state constitutional ban on the practice in 2006.

The University of California said in its amicus brief that, post-1996, it has spent more than $500 million implementing outreach programs that “run the gamut from outreach programs directed at low-income students and students from families with little college experience, to programs designed to increase UC’s geographic reach, to holistic admissions policies.”

The 13 outreach programs are “extremely costly,” the university said, and “funding for these programs has declined over time.”

The UC undergraduates by race and ethnicity for fall 2022 were 32.2% Asian, 22.5% Hispanic/Latino, 22.2% White, 4.5% African American, 0.5% American Indian, 0.3% Pacific Islander, 2.8% domestic unknown and 15% international. 

The percentages pre-Proposition 209 were 37% Asian, 15% Hispanic/Latino, 36% White, 4% African American, 1% American Indian, 0% Pacific Islander, 5% Domestic Unknown and 1% international.

University of California President Michael Drake expressed disappointment in the high court’s ruling, calling the use of race in college admissions an “important tool” for other higher-ed institutions despite California’s own long-term ban on the practice.  

 “Student diversity remains a top priority for the University of California – one that we will continue to pursue with every tool available to us,” Drake said in a statement.

“The consideration of race was not the conclusive solution to inequities in college admissions, but it was an important pathway to address systemic deficiencies,” he said. Without it, “we must work much harder to identify and address the root causes of societal inequities that hinder diverse students in pursuing and achieving a higher education.”

Echoing the University of California’s experience, Moody’s Investors Service said in a June 30 comment that outreach programs may prove “costly and complicated” for colleges and universities.

“The effective end of affirmative action is likely to increase institutions’ expenses as they dedicate resources to modify existing admissions processes, which could include hiring new staff, implementing new technology, revising outreach strategies and restructuring financial aid packages,” Moody’s wrote. “However, the credit impact will be modest since the most affected schools typically have strong financial resources to absorb the additional expenses. They are also more likely to have in place the admissions and legal staff to handle changes in policy.”

In the wake of its ban, called Proposition 2, the University of Michigan “was forced to radically alter its admissions process in order to even approach the diversity levels achieved prior to Proposal 2,” the school said in its amicus brief.

“That change was so disruptive that the response not only took time — over 15 years and counting — but vast resources and efforts extending far beyond university campuses, as U-M developed extensive new race-neutral initiatives that reached into school districts around the state. Many schools lack the resources that U-M has been able to put into this effort, and would not be able to undertake such a broad array of initiatives to respond to such a disruptive change in the controlling law.”

Like Moody’s and Fitch, S&P Global Ratings said it does not expect any immediate ratings impact but warned of likely future lawsuits and said it will be “critical” for colleges and universities to “navigate the new legal landscape carefully. If they do not, this could open schools up to more lawsuits, which are costly and take time,” said S&P analyst Jessica Wood.

“Beyond a likely increase in lawsuits, we will probably see colleges increase targeted recruitment and expand financial aid programs, while a broader move to test optional is expected across the industry,” Wood said. “Some of these strategies could be costly and schools could face a financial impact as they implement various programs and scholarships to promote diversity.”

Worries about soft enrollment trends comes as the U.S. higher education sector faces a slew of other challenges. While maintaining a stable outlook on the sector, Fitch dubbed it “deteriorating” heading into 2023 as inflation, labor and wage challenges pressure operating margins. S&P has a “mixed” outlook on the sector, and Moody’s warns that high inflation will continue to strain university budgets through at least fiscal 2024.