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Moody's: Tax-Free Bond Elimination Would Hurt Private Colleges

December 14, 2017

Eliminating private activity bonds as proposed in a Republican tax overhaul would hurt private colleges and universities, placing them at a competitive disadvantage, according to a new report issued by Moody’s Investors Service.

Qualified private activity bonds are exempt from federal taxes, allowing some institutions, including private colleges and universities, to borrow money at lower rates than they would otherwise be able to access. But a tax reform bill that passed the U.S. House of Representatives in November would eliminate private activity bonds, drawing worries from higher ed advocates.

In its evaluation, Moody’s said small private colleges could struggle to invest in facilities without tax-exempt bonds. Small private colleges already face a competitive environment, Moody’s noted, meaning they have narrow operating margins and little ability to absorb higher borrowing costs. They would face a crunch even as keeping facilities up-to-date is considered important for enrolling students. Even larger private universities would see their credit negatively affected by the loss of access to tax-free bonds, according to Moody’s. Although large institutions enjoy advantages of scale and have lately been able to make use of low interest rates in the taxable bond market, where costs of compliance are lower, they would face budgetary pressure in the event of a rise in interest rates coupled with the elimination of tax-free bonding.

Public universities would still have the ability to issue debt on a tax-exempt basis if private activity bonds are eliminated. So the elimination of the bonds could put private institutions at a competitive disadvantage, Moody’s noted. The ratings agency already anticipates closures and consolidation among small private colleges, and a change like the loss of private activity bonds could add to such a trend.

The elimination of the bonds was not included in the tax reform bill that the Senate passed. Republican leaders have a deal on a reconciled tax bill, they said Wednesday, but not all details were immediately available. Lawmakers have indicated in recent days that they were considering not ending tax breaks for private activity bonds, and some initial press reports indicated the reconciled bill would preserve private activity bonds.

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Rick Seltzer

Rick Seltzer, Projects Editor, oversaw special projects and coordinated daily production for Inside Higher Ed from 2019 through May 2021. He joined the publication in 2016, covering finance and management. Previously, he worked as a reporter for The Baltimore Business Journal, The Bloomington Herald-Times, the Central New York Business Journal and The Harrisburg Patriot-News. He has covered numerous business, municipal, government and general assignment beats. Rick graduated from Syracuse University in 2008.

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