Moody's Investors Service: Student loan interest rate increase is 'credit negative'

The doubling of interest rates on some federal student loans is a "credit negative" for U.S. colleges and universities, because it increases the cost of student borrowing at a time when some tuition-dependent colleges are already struggling to maintain enrollment and grow revenue, Moody's Investors Service said Monday.

Moody's Weekly Credit Outlook says the jump as of Monday from 3.4 percent to 6.8 percent on Federal Direct Subsidized Loans for students also raises the probability of higher student loan defaults in the coming years.

"Higher borrowing costs will add to the forces already weakening demand for many colleges, especially those dependent on student loan funding for a large share of revenue," according to the Moody's report. "The negative effects will accumulate over time, rather than cause a quick enrollment shock for the upcoming fall semester because the higher rates will only apply to new loans for eligible undergraduates."

Colleges that mostly operate undergraduate programs and that tend to attract low- and middle-income students will face greater risk of weakened demand, the analysis said. These colleges are most susceptible to enrollment volatility caused by increased loan interest rates, according to the report.

The effect on for-profit universities will be greater because they derive significantly more revenue from student loans, the report states.

The interest rates on new federal subsidized loans doubled on Monday, after Congress failed to reach agreement on a course of action by the July 1 deadline.