Between 2008 and 2022, the U.S. population grew by 10%, an increase of 30 million people. Digging into the data during this 15-year period reveals remarkable underlying changes in U.S. demographics, which impacted both the economy and the municipal bond market. Understanding these demographic trends explains what we currently see and prepares us for future impacts.

In our last piece, we focused on the 55+ cohorts—the only ones to increase meaningfully over the period. Here, we explore the impact of the stagnant under-18-year-old cohort on higher education and what we should expect over the next couple of decades.

Part 2: Demographics and Higher Education

A deeper look into higher education enrollment data tells a story contrary to media headlines. While overall enrollment¹ decreased by 18% since its 2011 peak of 15.8 million students, four-year schools that we most associate with post-secondary education hold their own. The 3 million seat decline is mainly from two-year public schools like community colleges and for-profit institutions, which saw enrollment drop by two million and one million seats since 2011.

Some Higher Ed Institutions See Enrollment Holding Steady

Source: U.S. Department of Education, National Center for Education Statistics, Integrated Postsecondary Education Data System (IPEDS). As of fall 2022.

Lining up historical enrollment with population demographics

While this demographic series looks at 2008 to the present, evaluating higher education attendance trends during that period requires going back to 1990, the birth year for students graduating high school in 2008. As it turns out, from 1990 to 2008, the U.S. population under 18 years old increased by 10 million, and the annual high school graduating class increased by 30% to 3,100. But post-secondary enrollment didn’t keep up with the growth. Instead, we saw:

• Four-year state school enrollment increased by 9%, or 500,000 seats;
• Four-year non-profit school enrollment increased by 1% or 25,000 seats, and
• Two-year public community college enrollment declined by 41%, a loss of two million seats.²

Population Under 18 Years Old Increased 15% Between 1990-2008

Source: American College Testing Program, unpublished tabulations, derived from statistics collected by the Census Bureau, 1960 through 1969. U.S. Department of Commerce, Census Bureau, Current Population Survey (CPS), October 1970 through 2022.

Several factors have influenced college attendance over the past 15 years, but contrary to public opinion, the population doesn’t appear to be a direct influence. Two likely contributors are the value proposition due to rising tuition costs and a growing economy with a strong job market. We expect the COVID-19 pandemic impact to be temporary as we already see improvement in 2023 figures. We will come back to these later.

The four-year institutions issue municipal debt, often secured predominately by tuition revenues. While the overall higher education trend isn’t as straightforward as the media presents, there is no denying the struggles concentrated in small private nonprofit regional schools. The statistics indicate that high school graduates are more attracted to larger schools and public universities (called “state schools” due to large state subsidies that reduce tuition). Often, when faced with declining enrollment, schools first explore strategies that decrease profitability in a bid to draw more students. Conventional attempts include increasing scholarships, building new dorms or other facilities, and hiring more faculty to increase degree and major opportunities. If unsuccessful, these strategies weaken the school's profitability and concurrently decrease the endowment as funds are used for these higher expenses at an unsustainable pace.

Does the future get brighter for small colleges?

Pressure on higher education enrollment will increase over the next decade. Without dramatic changes in higher education opportunities, we expect more struggles, closures, and mergers. Here’s why:

Compared to 1990-2008, which saw the number of graduating high school students increase 30% to 3,100, in 2022, just under 3,000 students graduated from high school. If the past 15 years saw a slight increase in four-year college attendance despite meaningful growth in the eligible applicant pool, the next 15 years, when there is no growth in this cohort, does not bode well for college attendance. Overall, small liberal arts colleges are not a dying breed, but we expect that decreasing enrollment will shrink the universe of smaller schools. Schools with a smaller geographic draw, weaker reputations, and limited offerings have less flexibility to adapt.

The Under 18-Years-Old Population 2008-2023 Isn’t Growing

Source: American College Testing Program, unpublished tabulations, derived from statistics collected by the Census Bureau, 1960 through 1969. U.S. Department of Commerce, Census Bureau, Current Population Survey (CPS), October 1970 through 2022.

A potential positive for higher education enrollment is a cooling labor market. The value of an advanced degree rises when competition for jobs increases. School attendance is also a popular place to “wait out” a slowing economy. International student enrollment is also expected to rise, potentially above historic rates pre-COVID. That group hovers around 10% of enrollment and most often pays full tuition, a rarity for students with U.S. citizenship.

The bigger demographic picture

The staggering decline in two-year community college attendance has had a significant impact on our economy. With two million fewer annual graduates today than 15 years ago, this appears to be directly linked to the shortage of nursing and health science professions such as physician assistants, technicians, and radiologists—some of the most popular degrees obtained from community colleges.

In our last piece, we discussed the additional strain on hospitals and other healthcare facilities as the U.S. population ages. Over the past two years, we have seen hospital and nursing home beds reduced due to an insufficient supply of professionals to support them. Indeed, nurses are currently flown in from other countries to fulfill some of the demands.

A combination of a larger healthcare workforce and improved pay is required for the growing need for these positions. A softening job market could make these professions more attractive.

Investment Implications

As the population continues to age and the younger cohort shows little growth, stakeholders must navigate challenges within the municipal bond market with strategic foresight. While we expect the broad higher education sector to continue to face headwinds, we believe opportunities still exist within the market.

Regarding the management of VanEck’s suite of municipal bond ETFs, we take a bifurcated approach. When evaluating investment grade bonds, we are more comfortable owning a broad array of higher education bonds from 4-year universities that we expect will continue to provide students with a robust value proposition. Within the high-yield funds, we remain selective and continue to judiciously seek opportunities within 4-year, small, rural colleges that attract a regional student body.

As we continue to analyze how these demographic shifts play out, one thing is certain: all sectors in the municipal bond market will feel the impact. We will continue to examine how demographic shifts affect states, cities, and other sectors in future editions of our series.

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