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Moody's: Higher Ed Gets a Credit Positive But Its Future is Mixed

Moody’s Investors Service says that the higher education sector was recently blessed with a credit positive but that the sector will experience mixed credit conditions in the next few years.

On November 1 the U.S. Department of Education announced changes that will make it easier for existing and future federal student loan borrowers to get reduced payments, according to Moody’s vice president Karen Kedem. Changes in the “Pay as You Earn” loan repayment program is “credit positive for higher education because it reduces the likelihood that a borrower will default and it has the potential to encourage borrowing, which would reduce the demand for university scholarships and help bolster tuition revenue growth,” Kedem wrote.

Changes in the program will make it easier for students to apply and qualify for it. Additionally, loan payments will be capped at 10% of discretionary income instead of 15% and loan forgiveness will occur after 20 years of payments rather than 25 years of payments.

From fiscal year 2005 to fiscal year 2010 the federal student loan default rate in the first two years of repayments  went up substantially. Schools with high default rates are at risk for being declared ineligible to receive federal financial aid, Kedem said.

The new program is “particularly beneficial for for-profit universities, historically black or Hispanic serving universities, and community colleges that tend to have higher-than-average default rates.”

In a separate Moody’s report, Kedem wrote that the outcome of the U.S. national elections has mixed credit implications for higher education. The election’s resulting alignment of congressional and presidential forces will be credit negatives for some sectors.

Moody’s expects greater federal regulation of higher education in the next four years. “Some regulatory priorities are credit negative for higher education, in particular, these include initiatives to establish criteria that will effectively limit the sector’s ability to increase tuition,” Kedem wrote. Schools that Moody’s rates lower are generally more dependent on tuition as a source of their operating income, Kedem indicated.

“The Department of Education is likely to renew efforts to implement gainful employment regulations, which require colleges to demonstrate that students can find jobs that enable them to repay their high student loan debt,” Kedem wrote. “Gainful employment is highly credit negative for for-profit universities, many of which cannot easily meet these standards, but has the potential to indirectly benefit much lower priced community colleges.”

Both for-profit universities and community colleges serve the same demographic, Kedem explained. If the former institutions decline, the latter institutions may pick up some students who would otherwise attend the for-profit schools.

Cuts in federal spending for higher education in the next four years will also be a credit negative for the sector, Kedem wrote. There may be cuts in federally subsidized student loans, which would hurt some universities. However, Pell Grants are likely to be protected and this would be a credit positive to community colleges and other colleges whose student bodies are largely poor.

Federal research funding for colleges and universities may be cut as soon as the start of 2013 with the sequestration. This would be a short-term credit negative for many schools, with the top-tier universities probably being least affected.

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