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S&P Finds Increased College Applications Complicate Demand Assessment

August 23, 2007

Assessment of institutional demand characteristics is part of the credit ratings process. An enormous increase in one of those characteristics—online applications—causes Standard & Poor's to report the need to look to other indicators to gauge demand for individual institutions.

The increase is attributed to greater use of common and online applications, a growing number of college-age students, and rapid population growth in specific regions of the U.S. Concern about increasing selectivity, thus prompting prospective students to apply to more institutions, is another factor.

Because institutions with more flexibility can better react to demographic and economic changes, admissions flexibility is an important factor in demand analysis. However, as freshman applications continue to increase at a breakneck pace, Standard & Poor’s may have to look to other indicators to estimate demand for individual institutions.

Increased Applications. Applications to higher education institutions have increased at a disproportionate rate in the past two years. Almost 75 percent saw an increase in Fall 2005, according to the National Association for College Admission Counseling (NACAC). Increasingly common are increases of 10 percent or more from year to year.

The factors attributable to this increase include:

  • Demographics. Driving the increasing number of students applying to colleges and universities are increases in both the number of high-school graduates as well as the college participation rate. Certain regions of the U.S. are subject to an even greater increase.
  • Common Applications. Common applications allow prospective college students to apply to multiple institutions. Unclear is whether this development will result in students applying at even more institutions or whether it simply provides more ways of applying to the same number.
  • Online Applications. In addition to many institutions adding online applications, some have also waived fees for students who apply online. According to NACAC, about half of all applications received by colleges for Fall 2005 were online.
  • End of Early Decision. Certain selective institutions have abolished early decision, which is likely to result in an increase of applications during the regular admissions period and to further augment the selectivity of these institutions.

Demand as a Credit Factor. In evaluating an institution’s demand, S&P considers its niche and the current higher education environment. The evaluation typically includes demographic trends, the popularity of specific programs, and competition from other institution. Applications were historically viewed as a measure of demand for an institution. S&P will more closely evaluate increases in applications along with traditional measures of credit assessment, which include absolute enrollment, number of applications, acceptance rates, student quality, enrollment yields (matriculation rates), and retention rates.

In its rating process, S&P also evaluates selectivity and yield (the matriculation rate of accepted incoming students), student quality, and retention.

Overall Industry Standing. Although highly visible, demand is only one component in the rating equation; another is financial performance and resources. Overall, higher education is performing quite well with huge growth in financial resources, increases in private gifts, and stable operating budgets. While the outlook for growth is positive until about 2012, it is unknown whether institutions are overbuilding and will have excess capacity to deal with at that time.

Staff Resource: Anna Marie Cirino, associate director, financial management policy