Student debt relief ‘modestly credit positive’ for colleges, Moody’s says

Dive Brief:

• President Joe Biden’s plans to forgive some federal student loan debt and revamp income-driven repayment are “modestly credit positive” developments for the higher education sector, according to Moody’s Investors Service.
• Plans to forgive large portions of student debt allow borrowers more flexibility to reenroll in college in order to finish degrees or seek additional education, Moody’s said in a Thursday commentary.
• Biden’s plans for income-driven repayment will have a greater effect on the sector because they could boost higher education’s long-term affordability, supporting demand for college and students’ ability to access it, Moody’s said.

Dive Insight:

Biden grabbed headlines in August by announcing plans to forgive up to $10,000 in federal student loan debt for individual borrowers making up to $125,000 per year, or up to $20,000 for those who received federal Pell Grants when they were in college. 

That would have broad ramifications for personal finance, clearing out about $300 billion in debt for 43 million borrowers, according to Moody’s. More than half of those borrowers, 27 million, are eligible to receive up to $20,000 in forgiveness. The forgiveness limits are high enough to clear the entire loan balances for about 20 million eligible borrowers.

Moody’s considers the debt forgiveness a modest credit positive for the sector because it is a one-time action unlikely to have a long-term effect on the demand for higher education or its cost. The bond ratings agency also flagged the possibility that lawsuits trying to block the move could delay or prevent it from taking place.

Likely of longer-term value to the sector are planned changes to income-driven repayment plans, which tie loan repayment amounts to how much a borrower earns. The Biden administration plans to cut in half the amount undergraduates enrolled these plans pay each month to 5% of their discretionary income. It also wants to change the threshold for discretionary income, cover unpaid monthly interest to prevent balances growing for borrowers who make payments, and forgive $12,000 in loan balances that remain after 10 years — down from the current standard of 20 years.

“The IDR changes will likely lead to millions of borrowers shifting from conventional repayment plans to the income-based option,” Moody’s said. “Lower monthly cost burdens for existing and prospective borrowers of federal student loans are credit positive for the sector because improved affordability could support higher demand and greater access for higher education across the socioeconomic spectrum.”

In addition, an earlier timeline for debt forgiveness under income-driven repayment could give borrowers with undergraduate debt the ability to seek graduate education and terminal degrees earlier than they would otherwise.

Still, enrollment growth from the income-driven repayment changes is tied to how effectively it is put in place, Moody’s said.

Moody’s flagged two possible downsides for the sector. The Biden administration referenced holding colleges accountable for price increases, although it didn’t provide specifics. And the debt forgiveness plan has exacerbated political divisions that could hurt higher ed’s reputation.