Declining College Savings a Credit Negative for Higher Ed

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The decline in savings for college by American families is a credit negative for the U.S. higher education sector, as it slows the potential for tuition revenue growth, according to Moody’s Investors Service.

The decline also further strains university financial aid budgets while adding to the debt burden of students, the ratings agency said.

Sallie Mae, the leading private lender to college students, released a report last month showing the decline in college savings, both in the number of families saving as well as the amount being saved.

Approximately two-thirds of the more than 500 public and private colleges and universities rated by Moody’s rely on tuition and fees for more than 50% or more of their operating revenue. According to Sallie Mae, family income and savings account for 40% of how Americans pay for tuition and other costs of attending college.

Americans expect to pay for the remaining percent with money from relatives and friends, borrowing, and grants and scholarships.

“A growing gap between families’ savings and the cost of a four-year degree will continue to pressure universities to moderate tuition increases while growing financial aid awards, resulting in weak net tuition revenue growth,” Moody’s analysts Karen Kedem and Eva Bogaty wrote in a report released Friday. “Barring the sector’s ability to grow financial aid, this will also result in further growth of student debt burdens.”

In 2013, 50% of American families saved for college compared to 60% in 2010, according to the Sallie Mae report. The amount of savings significantly lags the growing costs of higher education, resulting in pressure on universities to offer more financial aid, analysts said.

The sector continues to struggle to grow revenue, with 18% of private university and 15% of public university respondents projected an outright decline in net tuition revenue for fiscal 2013, based on Moody’s fourth annual tuition survey. An even larger amount — one third of private and public universities — project that net tuition will grow by less than 2% in 2013, a level below the average rate of inflation.

“Such weak revenue growth often means a college cannot afford salary increases or new program investments unless it cuts spending on staff and existing programs,” Moody’s said.

In addition to declining college savings, Moody’s said the sector also faces regulatory and political pressure from tougher governmental scrutiny of higher education costs and disclosures practices, which hinders tuition and revenue from rising at past rates.

Analysts said that if student aid and loan programs are curtailed to any degree in federal budget negotiations, colleges may be further pressured.

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