The outlook for the not-for-profit higher education sector this year is "increasingly volatile," according to a report Standard & Poor's released Monday.

This means the agency expects to see an increased number of both positive and negative rating and outlook changes throughout the year.

"While we expect stable credit quality for a majority of our rated higher education institutions, the range of risks facing the sector could also lead to uneven credit performance, with the potential for a widening gap between stronger and weaker credits," said credit analyst Jessica Matsumori. "The magnitude of this divide will largely depend on each institution's specific characteristics and management's response to the credit risks it faces."

Colleges and universities have continued to face financial challenges following the market declines in 2009. While endowment market values have now returned to near pre-recession levels, other financial pressures remain, worsened by flat to declining enrollments for some universities and falling net tuition revenue due to scholarship discounting.

Challenges that Standard & Poor's believes to be particularly prevalent this year include stressed operating performance, largely from revenue constraints, deferred maintenance needs in a capital and technology dependent industry, and tuition affordability and scholarship costs.

These challenges present both opportunities and risks that are causing many institutions to reassess their current business models, including their compliment of programs, delivery systems, cost structure and revenue initiatives, the report said.

"Therefore, we believe the long-term prospects for this sector remain strong," analysts wrote. "However, sector pressures could lead to substantial operational changes for some organizations during the next few years, which will likely affect more sector ratings and outlooks in the short-to-medium term."

The higher education sector has historically been stable, according to Standard & Poor's. As of Jan. 31, about 89.9% of its outlooks on the sector were stable. Around 5.5% were positive, 4% were negative, and 0.2% were developing. Last year, the agency made 12 rating upgrades and 16 downgrades.

The greatest risks are to lower rated institutions that don't proactively respond to the challenges they face. The higher rated universities, which tend to have established demand niches, greater revenue diversity, and strong balance sheets, are expected to retain or improve their credit profiles.

Challenges that are expected to remain over the next three to five years include investment preservation, given current endowment spending rates, experimentation with alternative educational and revenue models, an uncertain federal funding environment, and turnover in leadership teams, among others.

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