As families struggle in the aftermath of the global financial crisis and recession, affordability has become a key concern when analyzing private higher education credits, according to a report from National Public Finance Guarantee Corp.
Education institutions struggling with applications have a choice, the bond insurer said in the report. They can maintain net tuition costs and hope that reduced enrollment is only temporary. Or, they can maintain enrollment by reducing costs and increasing the number of students they accept.
As institutions respond differently to this dilemma, NPFG expects to see “greater differentiation” among credits in the sector.
The report’s authors said continued student demand and balance sheet strength will be key determinants in analyzing which institutions will meet the challenges ahead.
The report is based on a review of NPFG’s portfolio of 144 private higher education credits in 33 states. The insurer has $6.57 billion of exposure to the sector, including nearly $2 billion in New York. Almost three quarters of the portfolio is in the single-A range, according to NPFG’s internal metrics.
The problem with maintaining costs as they are results from three decades of tuition inflation, which has made private colleges increasingly unaffordable.
In the 2000s, total costs including tuition, fees, room, and board for private colleges and universities climbed 2.4% faster than the consumer price index, according to a 2009 College Board study cited in the NPFG report.
In the 1990s, the inflation-adjusted increase was 2.5%, and the decade before it was 3.9%.
Not surprisingly, student debt has been growing, too.
In 2004, the average student debt burden at private nonprofit universities was $21,500, the report said. Just four years later, the average jumped 6.5% to $27,650.
Recent data from the College Board suggests that 15% of undergraduate degree recipients and 23% of graduate degree recipients had $40,000 or more in debt. Also, the College Board found that more than half of high school students last year were excluding specific colleges from consideration solely because of costs.
Families aren’t just staying away from taking on more debt. In many cases, the needed loans simply aren’t available.
Private loans not guaranteed by the government, which the report said accounted for 9.2% of recent private education funding, declined dramatically since the recession began.
For instance, Student Lending Analytics, an independent research and advisory firm, estimated that private loan origination for the current academic year was between $7 billion and $8 billion, whereas in 2007 it peaked at $23 billion.
Shrinking investor appetite for student loan bonds and asset-backed securities is a primary reason for the decline. In addition, some originators have left the market, and those still around are charging an average of more than four percentage points more than they did in 2007.
“The implication is that any shortfall in private student loans may have to be made up by increases in other funding sources,” the report said.
Other sources are constrained, however, so schools may have to become more affordable or carry the burden in some way.
NPFG noted that in 2008, scholarships accounted for 15% of private education funding, but the figure jumped to 24% in 2009.
Meanwhile, many schools will be struggling with new costs because the Federal Family Education Loan Program — created in the early 1990s to guarantee student loans issued by certain lenders — was eliminated in favor of direct lending by the federal government.
NPFG — which called 2010 “a watershed year in student loans” because of the Obama administration’s decision to get rid of the program — said the legislation could cause significant administrative and budgetary pressure for thousands of private institutions.
“With federal student loan originations moving to the direct loan program, there will be more certainty about the availability of financing for the loans, but there will also be greater administrative and financial burden on schools making the transition,” the report said.
For institutions looking to keep their credits at high-grade amid these challenges, NPFG advised, among other things, to offer competitive advantages through academic quality, unique programs, and strong financial management.
NPFG is the muni-only insurer created early last year by MBIA Inc. The company, rated Baa1 by Moody’s Investors Service and A by Standard & Poor’s, manages the industry’s largest municipal bond portfolio, but is currently inactive in the primary market as it awaits the outcome of pending litigation.
