Following the free tuition at public universities in New York, private colleges are struggling to grow their revenues facing a new threat that could further weaken their finances and make borrowing harder.
The State of New York passed in April a bill that will by 2019 offer free tuition at community colleges and public universities in the state to residents whose families make less than $125,000 per year. At least six other states are considering similar laws, to ease the burden of student debt that has doubled since 2008 to over $1.3 trillion, according to the Federal Reserve Bank of New York.
Fund managers expect that such initiatives, combined with other pressures that have long been building up, will cause bonds issued by smaller private colleges to fare far worse than the broader market if interest rates continue to rise.
According to Reuters, the bond market has largely ignored such a threat as historically low rates encourage many investors to take on greater risks in search for better yields. “There are many schools that are going to be losers in this game,” said R.J. Gallo, a portfolio manager at Federated Investors in New York. Gallo, who owns debt issued by well-known institutions such as Northeastern University in Boston and Northwestern University in suburban Chicago, said that bonds of lower-rated schools yield only about 1.3 percentage points more than AAA-rated ones. That, for him, is not enough to compensate for the additional risk.
Nearly 80 percent of college-age students in New York qualify for the scholarship, according to state estimates. While the state has yet to say how many new students it expects to take advantage of the plan, analysts say that they expect a significant number forgoing private colleges located in the Northeast and opting for public options instead.
