Turmoil in the credit markets has reduced the availability of student loans and left smaller, less-wealthy colleges and universities that are heavily dependent on tuition revenues most vulnerable to any significant disruption in the student loan market, according to a
The most vulnerable schools - which typically have enrollment under 2,000 and depend on tuition for about 75% of their revenues - have limited financial recourse if tuition is not paid on time by the budgeted number of enrolled students, compared to larger and wealthier public and private institutions. The at-risk schools are mostly rated in the Baa category, Moody's said, and private institutions rated in that category have about $5 billion in outstanding debt.
"As the peak borrowing season for students begins with the arrival of June, many of these colleges and universities remain concerned that student loans will become more costly and slower to be processed than in previous years," said Moody's vice president Laura Sander, author of the report. "Because of probable lower lender discounts and higher cost of capital for lenders, the cost of borrowing for many students will likely increase."
The report comes two weeks after the Department of Education acted to avert a possible lending crisis by proposing to temporarily advance money, through Treasury borrowing, to lenders who participate in the Federal Family Education Loan program. If the lenders are subsequently unable to securitize new student loans once they are made, they will be able to sell them to the department until September 2009.
Many lenders said they planned to remain in the FFEL program in light of the Education Department's proposal, but the possibility of a significant lending disruption was nonetheless amplified this week when several banks, including Citi and JPMorgan Chase & Co. said they would stop lending to community colleges, for-profit universities, and less competitive institutions.
The Moody's report does not include a precise estimate of the number of vulnerable schools, but Roger Goodman, Moody's higher education team leader, said that the agency currently rates less than 40 private institutions that have enrollments less than 2,000 and that rely on tuition for about 75% of their revenue.
Tony Pals, director of public information at the National Association of Independent Colleges and Universities, said it is clear that smaller schools with relatively low loan volume and a high percentage of low-income students are the most vulnerable, but it remains unknown to what degree they will be affected by the credit crunch. There are 1,600 private institutions in the country with an average enrollment of about 1,900 students, but only a handful of students at those schools are likely to have any difficulty obtaining loans, Pals said.
"It's simply too early to know with any reasonable certainty," he said. "It's worth keeping in mind that despite facing numerous financial and market challenges over the past few decades, small colleges have proven to be surprisingly resilient. The overwhelming majority of these institutions will be educating students for years to come. At the moment, our concern is for those low-income students who need continued access to the credit market in order to make college a reality."
In contrast to smaller and less-wealthy schools, financially strong public and private universities likely will not see dramatic effects from the student loan turmoil because of low dependence on tuition revenue, large student aid endowments, and extremely deep and "price-inelastic" student demand, the Moody's report said.
But the smaller institutions could experience a number of stresses, including pressure to accept modestly lower enrollments if students are unable to secure funding sources at affordable levels. If borrowing rates rise for students, the schools may have to increase tuition discounting, slow the growth of tuition rates, accelerate fundraising for student aid, and tighten other forms of spending, according to Moody's.
Meanwhile, if there is any disruption or delay in receipt of student loan revenues, the smaller schools would receive revenue later and may then have to tap a line of credit from a local bank more than they might have or earlier than they might have, the report said.
