Compass Point: Congress Unlikely To Pay For Free Community College Initiative

President Barack Obama and the White House announced on Thursday it will propose a program that would make two years of community college free for qualifying students.

Issac Boltansky of Compass Point commented in a note on Friday that Congress is required to approve the initiative, an event that is unlikely to happen.

“We doubt that lawmakers will oppose this proposal on principle,” Boltansky wrote. “Rather, our sense is that this proposal faces a steep climb to passage because the White House is unlikely to propose a budgetary offset that Congressional Republicans will find acceptable.”

The analyst adds, “While we expect the community college proposal to drive a fair amount of headlines in the days ahead, we simply do not believe there is the ideological leeway or legislative capacity necessary for Congressional passage.”

Boltansky notes that in the event that this proposal is enacted, it will be considered as a negative for the for-profit schools as it would weaken demand as potential students migrate to community colleges.

Higher One Holdings, Inc (NYSE: ONE) will see a negative impact given that a significant portion of its tuition refund business comes from community colleges. Performant Financial Corp (NASDAQ: PFMT) will see a “slight negative” impact as lower loan levels would result in lower default rates.

NelNet, Inc. (NYSE: NNI) along with Navient Corp (NASDAQ: NAVI) will see “little direct impact” as DL servicing comprises a small percentage of earnings.

Finally, SLM Corp (NYSE: SLM) will also see “little direct impact” as community college students typically don't take out private student loans.