What’s Going Wrong in Higher Education? Key Risks Students and Schools Face

Higher education risks are no longer a future concern. The sector is under real, measurable pressure right now, from shrinking enrollment pipelines and post-pandemic financial fragility to federal funding cuts and a growing public debate over what a college degree is actually worth. This article breaks down what institutions and students are facing, and what the data tells us about where things are heading.

What Institutions Are Up Against

The risks facing colleges and universities are severe and structural. They are not evenly distributed. Elite institutions with large endowments, diversified revenue, and selective admissions have real buffers. Smaller, tuition-dependent schools are in a much tighter spot.

Federal research funding cuts are hitting hard. The Trump administration's proposed fiscal 2026 budget included an approximately $18 billion reduction to the National Institutes of Health and a $5.1 billion cut to the National Science Foundation compared to prior years, according to The Pew Charitable Trusts. Federal funding for university research and development totaled $60 billion in fiscal 2023. Those are not cuts institutions can easily absorb.

At the state level, the picture is just as difficult. At least 15 states proposed or enacted cuts to public university and college funding during 2025 legislative sessions. Even in states that avoided outright cuts, flat funding effectively means a real-dollar reduction once inflation is accounted for.

International student enrollment was one of the most reliable revenue streams for many institutions. That has changed. NAFSA projects up to 150,000 fewer international students enrolled in the U.S. for 2025-26, representing a potential $7 billion drop in economic impact. International students pay full out-of-state tuition, and at many regional universities they effectively cross-subsidize domestic financial aid. Losing them is not a minor budget line item.

S&P Global Ratings reports that downgrades have outpaced upgrades by 2.2 to 1, with unfavorable outlooks exceeding favorable ones by a margin of 3 to 1. The U.S. Department of Education has placed over 450 public and private nonprofit institutions on its Heightened Cash Monitoring schedule, with 35 on the more severe HCM2 track, which scrutinizes their ability to remain eligible for federal student aid.

Moody's placed a negative outlook on the sector and has maintained it. For 2026, the agency expects revenue to grow across the sector, but not as fast as expenses.

What Students Stand to Lose

Students face a different but overlapping set of risks. When a school closes, students rarely come out ahead. Research shows that students attending colleges that close face a lower likelihood of eventually earning a credential. Disrupted enrollment sets back graduation timelines, reduces the chance of degree completion, and can strand students mid-program with debt and no credential to show for it.

The debt picture is deteriorating. About 5.3 million borrowers have defaulted on federal student loans, and the Department of Education estimates another 4 million are expected to default in the coming months. Federal student loan interest rates remain elevated. According to the Bipartisan Policy Center, a borrower who took on average undergraduate debt in 2024-25 would pay $6,430 more over the life of their loan than someone who borrowed the same amount in 2020-21.

The 2025 budget reconciliation bill made things harder still. It capped federal borrowing through Parent PLUS, Grad PLUS, and Professional PLUS programs. Students who hit those caps will likely need to turn to private lenders, where terms are less favorable and approval is not guaranteed, particularly for programs that do not produce high earnings.

Even students who graduate and find work are not necessarily in a strong position. In 2024, 53% of graduates were underemployed, meaning they were working jobs that did not require their degree or that did not give them enough hours.

The ROI question is real, but more nuanced than headlines suggest. The Foundation for Research on Equal Opportunity analyzed 53,000 degree and certificate programs and found the median ROI for a bachelor's degree at $160,000 over a lifetime. But that median covers an enormous range. Engineering, computer science, nursing, and economics degrees tend to produce returns of $500,000 or more, while many programs in the arts and humanities produce a fraction of that. The question is not simply "is college worth it" but which college, which program, and at what cost.

A Shrinking Pipeline of Future Students

The demographic picture has been clear for over a decade. Birth rates fell sharply during the 2008-09 recession. The children born in those years are now reaching college age, and the numbers are not there.

The National Center for Education Statistics projects a nearly 15% drop in the number of high school graduates between 2025 and 2037. The share of high schoolers enrolling in college immediately after graduation has fallen from 70% to 62% over the past decade. That decline reflects a combination of financial pressure, skepticism about degree value, and the growth of alternatives like employer training programs and online credentials.

The Federal Reserve Bank of Philadelphia projects that overall higher education enrollment could drop by as much as 15% from 2025 to 2029, with the steepest effects concentrated in the Northeast and Midwest. Some institutions in those regions, which are already contending with weaker enrollment, could face even larger declines.

The international student pipeline was partially compensating for these demographic trends. It no longer can. Visa policy changes, anti-immigration signals from federal agencies, and delays in processing have sharply reduced the number of prospective international students applying to and enrolling in U.S. institutions.

The chart below illustrates the projected decline in U.S. high school graduates from 2025 onward, a trend that will intensify competition for an already-shrinking pool of traditional-age students.

The Tuition Discount Trap

Faced with fewer applicants, many institutions have responded by offering deeper discounts to fill seats. The strategy makes sense in the short term. Over time, it erodes the financial base.

According to the National Association of College and University Business Officers, the average tuition discount rate for first-time, full-time undergraduates at private nonprofits reached 56.3% in 2024-25, another record high. That means for every dollar of listed tuition, these schools are giving back more than 56 cents in institutional grant aid. Net tuition revenue rose just 1.4% in real terms over the prior year, barely keeping pace with inflation and not accounting for the federal policy changes that came after the data was collected.

For small to mid-sized private colleges that rely heavily on tuition as their primary revenue source, this is a slow squeeze. More discounting to attract students, lower net revenue per student, rising operating costs, and a shrinking pool of applicants. Those pressures compound each other.

It is worth noting that the NACUBO data was collected before the Trump administration's actions on federal grants, international student policy, and research reimbursement rates took effect. The 2025-26 numbers are likely to be worse.

Financial Fragility After the Pandemic

Federal pandemic relief funding allowed many struggling institutions to avoid the reckoning that their underlying financials demanded. That money is gone. What remains is a clearer picture of which schools were genuinely stable and which were living on borrowed time.

Forbes' 2024 "College Financial Grades" assessment of over 900 private nonprofit colleges found that 182 received a D grade, up from just 20 in 2021. A D grade signals serious financial vulnerability. It does not mean closure is imminent, but it means the margin for error is gone. Any further enrollment drop, cost increase, or revenue disruption can tip a school into crisis.

The structural problem is that colleges cannot easily restructure. Under federal law, filing for Chapter 11 bankruptcy immediately disqualifies an institution from participating in federal student aid, which is typically its largest revenue source. That removes the most common corporate restructuring tool from the table. The practical options are mergers, asset sales, or closure.

Some schools have pursued real estate sales and staff cuts to stay solvent. Analysts tend to view these as stop-gap measures unless they are part of a broader plan to right-size the institution to its actual enrollment.

What the Credit Markets Are Telling You

The bond market is functioning as a useful diagnostic tool. U.S. colleges took on more than $34 billion of debt in the state and local government market in 2025, a 28% increase from 2024, according to Bloomberg data. But who is borrowing and on what terms tells the real story.

Elite universities with triple-A bond ratings have accessed both taxable and tax-exempt markets without difficulty. They are borrowing to invest: new academic programs, updated facilities, and capital needs that had built up over several years of low-rate delay.

Lower-rated schools face a different calculus. According to Patrick Luby, senior municipal strategist at CreditSights, lower-rated schools that lose access to tax-exempt borrowing must compete against similarly rated corporate bond issuers, which means significantly higher debt costs. Investors are also asking harder questions about how schools plan to manage demographic and economic pressure over the next five to ten years. For institutions without compelling answers, access to capital is tightening.

Moody's maintained its negative outlook on the higher education sector heading into 2026. The July 2025 budget reconciliation bill also introduced new variables, including caps on graduate loan programs, which had been among the few consistent growth areas for some regional institutions.

The chart below compares bond issuance volumes for elite versus non-elite institutions, illustrating the growing gap in capital market access.

Closures, Defaults, and Consolidation in Motion

The wave of closures is not a projection. It is happening now.

More than 80 private nonprofit schools have closed or merged since the start of the pandemic. In 2025 alone, confirmed closures include Siena Heights University in Michigan, Limestone University in South Carolina, St. Andrews University in North Carolina, Northland College in Wisconsin, and Eastern Nazarene College near Boston. These are not marginal institutions. Several had been operating for over a century.

The pattern is consistent across closures: persistent enrollment decline over several years, a high dependence on tuition revenue, a modest or depleted endowment, and mounting debt. The final trigger varies, but the underlying trajectory is usually visible years in advance.

Strategic mergers are increasingly presented as the better alternative to abrupt closure. They give students more time to transition, preserve some programs, and reduce the community disruption that comes when a college, often a region's largest employer, shuts down without warning. But mergers require a willing partner and a legal structure that can absorb the liability, which is not always available.

For students caught in a closure, the outcomes are measurable and negative. Credential completion rates drop. Transfer credit recognition is inconsistent. Time to degree extends, which means more debt and more opportunity cost.

The Degree's Value Problem

The cost of attending college has risen significantly faster than median incomes over the past three decades. The National Center for Education Statistics estimates average annual tuition at a four-year public university at around $10,000 for in-state students and $27,000 for out-of-state students in 2025. Private institutions frequently exceed $38,000 per year. Total cost including room, board, and fees pushes those figures considerably higher.

At the same time, outcomes are uneven. The ROI on a degree depends heavily on field of study, institution type, completion rate, and local labor market conditions. The median figure looks acceptable. The distribution is the problem. A significant share of programs, particularly at for-profit institutions and in lower-demand fields, produce graduates with debt loads that their starting salaries cannot reasonably service.

The White House Council of Economic Advisers has noted that the likelihood of a negative ROI from a bachelor's degree has increased over recent decades, with the risk disproportionately affecting underrepresented minority students. That is a structural equity problem sitting inside a broader credentialing problem.

Public confidence in higher education has been declining for years. Institutions need to track and communicate career and earnings outcomes more clearly so students can make choices with greater confidence. The colleges that do this well, and build program offerings around demonstrable outcomes, are better positioned to attract students in a market where skepticism is growing.

The broader sector faces a difficult period. The institutions most at risk share a common profile: small, regional, tuition-dependent, with limited endowments and a declining local population of college-age students. Many of them have been running the same financial model for decades. That model is no longer viable. The question for leadership is whether there is still time and runway to build a new one. For a full record of institutional closures and mergers, the BestColleges closures list provides a regularly updated reference point.