Developing risks, including increased regulatory scrutiny, accreditation tightening, technology challenges, and governance conflicts are confronting the higher education sector, says Moody's Investors Service in a mid-year sector outlook.

Combined with lingering macroeconomic risks and worries about affordability and student debt, these developing risks are forcing universities to focus more aggressively on cost control amidst growing revenue challenges.

Moody's maintains a mixed outlook for the sector - stable for market-leading diversified universities, and negative for the remainder of the sector, according to the report, "US Higher Education 2012 Mid-Year Outlook Remains Mixed."

"Many of the credit challenges outlined in our January outlook for 2012 have intensified," said Moody's Assistant VP-Analyst Eva Bogaty, author of the report. "These include an economic recovery that continues to stumble, stagnant-to-negative investment returns, stress on federal and state budgets, and household net worth well below prior levels."

She said a minority of market-leading universities, generally those rated Aaa or Aa, has sufficiently strong balance sheets and diversified revenue sources to remain resilient and stable despite rising credit risks in the sector. However, the majority of Moody's-rated institutions is more dependent on student tuition, government funding, or both, and face greater credit pressure.

"Added to the macroeconomic pressures of recent years has been heightened public scrutiny and political focus on the issue of affordability, especially as the nation's student debt burden has been on the rise," said Bogaty. "Reflecting concerns coming from both political parties, President Obama announced a college affordability plan with a bid to expand federal student financial aid and reward public institutions that moderate tuition increases."

The mid-year report also captures the risks and potential benefits associated with the growth of online education and new technology platforms.

"The sector is at a critical point as the digital revolution challenges our collective understanding of learning models and delivery of education," said Bogaty. "With a rising number of leading schools now offering 'massive open online courses' or MOOCs, this will create new winners and losers, pressuring colleges to make significant investments."

The growing need for bolder leadership on college campuses has brought into focus the unique governance and management challenges for public universities, research universities, and heavily tuition-dependent small private colleges, according to Moody's.

"Strong and savvy leadership, along with clear and thoughtful strategic planning, have become ever more important," said Bogaty. "The underlying faculty-centric business model of higher education is evolving, and colleges and universities will have to adopt a shared governance model to meet the demands of a wider constituency in the future."

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