Congress is giving finance officials at America’s colleges and universities even more to worry about.

Schools already being threatened by rising costs, slower-growing state aid and a drop in undergraduate enrollment may also see the ranks of graduate students thinned if the House’s proposal to tax their tuition waivers becomes law. That could have a "significant negative effect" on the number of students in the programs, according to Moody’s Investors Service, which last week lowered its outlook on the higher-education sector because of the financial strains on a growing number of schools.

The proposed tax "either means they drop out, don’t apply or the colleges somehow find a way to increase their stipends,” Edith Behr, an analyst for Moody’s, said in an interview. It could also impact research activities at universities because many graduate students provide support to professors, she added.

The Baker Library of the Harvard Business School on the Harvard University campus in Cambridge, Mass.
The Baker Library of the Harvard Business School on the Harvard University campus in Cambridge, Mass. Victor J. Blue/Bloomberg

The proposal isn’t the only one in the Republican tax-cut bills that could worsen the financial outlook for colleges and universities. Another would end private schools’ ability to borrow in the tax-exempt bond market, where interest rates are lower, while the House and Senate measures would tax the investment income of wealthier endowments. The rollback of the estate tax and changes to deductions may also cut into donations.

The uncertainty surrounding federal policy changes was one reason that Moody’s lowered its outlook on higher education from stable to negative, indicating that it expects their finances to worsen over the next year and a half. Four-year colleges’ expenses are expected to grow 4 percent annually, while revenue is only forecast to increase 3.5 percent, the ratings company said.

Samantha Hernandez, director of legislative affairs for the National Association of Graduate-Professional Students, said the organization is already hearing from would-be students who may reconsider if the House plan becomes law. Over the last month, her association has received about two or three messages a day from graduate-school applicants looking for updates on the proposal.

Hernandez, who is a student at Arizona State University, said she expects the dip in graduate students’ enrollment to be especially pronounced among women, minorities and first-generation students. “There’s a huge concern,” she said.

Bloomberg News