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Moody's: Obama Higher Ed Plan Challenges Sector

President Obama’s plan to make colleges and universities more affordable and more accountable poses near-term credit risks, but could have long-term benefits, according to a recent report from Moody’s Investors Service.

The plan, which President Obama laid out in the State of the Union address on Feb. 12, includes proposed changes to the standards that determine eligibility for financial aid programs authorized under Title IV of the Higher Education Act of 1965.

Title IV funding, including student loans and Pell Grants for low-income students, represents a median one-third of operating revenues for universities rated by Moody’s.

“Overall, the proposed regulations would be credit negative for U.S. colleges and universities because the sector will face heightened accreditation activity that could lead to loss of Title IV funding and cause significant reputational damage,” Moody’s analyst Eva Bogaty wrote in the report. “Moreover, universities will have to invest both time and resources to adapt to the new standards.”

She added that in the long term, these investments are likely to improve transparency and, as a result, the public perception of higher education.

The proposal will likely escalate the likelihood of future sanctions imposed by not-for-profit higher education accrediting bodies that are recognized by the federal government and which share regulation responsibilities with federal agencies, according to Bogaty.

While the entire higher education sector will be impacted by the new accreditation standards, universities with a greater dependence on financial aid will be most affected. These include public universities, community colleges, and private colleges that traditionally serve a large portion of low-income students.

In addition, many of the private colleges that are in the lower rating categories could also stand to lose from any changes to Title IV eligibility.

“These subsectors also tend to lack the wealth necessary to invest in the institutional changes that may be necessary with any new accreditation standards,” Bogaty said.

The near-term credit risks of tightened accreditation standards include potential loss of an important source of revenue for universities that may be placed on warning or even lose accreditation because they cannot respond quickly enough to heightened standards and review; reputational risk and subsequent loss of student demand that could result from a warning or loss of accreditation; and management needing to invest time and money to ensure the college is meeting standards.

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