Jump in Student-Loan Interest Rates Will Cost Colleges, Too

In addition to the increased costs for borrowers and the possible political costs for Congress, the doubling of interest rates on federally subsidized student loans could cost colleges, too, according to a report released on Monday.

By letting the rate on the student loans rise from 3.4 percent to 6.8 percent, effective on Monday, Congress created a “credit negative” for American colleges, according to the report from Moody’s Investors Service, which rates debt securities. In its weekly report to subscribers, Moody’s analysts said that the higher interest rate will increase “the cost of student borrowing at a time when many tuition-dependent colleges are already struggling to maintain enrollment and grow revenue.”

The analysts added that colleges that rely heavily on undergraduate enrollment and on lower- and middle-income students stand to be hurt the most. “Because of a lack of revenue and programmatic diversity, these colleges are most susceptible to enrollment volatility caused by increased loan interest rates,” the analysts wrote, and may not be able “to mitigate lower enrollment by offering scholarships to offset increased borrowing costs or by lowering operating costs to offset declines in revenue.”

The report also noted that colleges shouldn’t expect “a quick enrollment shock” this fall. The effects will be felt, Moody’s said, as future borrowers survey their costs—assuming that Congress doesn’t undo the interest-rate raise with legislation.

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