The U.S. higher education sector is currently facing developing risks such as increased regulatory scrutiny, accreditation tightening, technology challenges, and governance conflicts, according to a Moody’s Investors Service mid-year outlook on the sector released today.

On top of the persistent macroeconomic risks and concerns about affordability and student debt, Moody’s said that these developing risks are driving universities to more forcefully address cost control given the rising revenue challenges.

In its recent U.S. Higher Education 2012 Mid-Year Outlook Remains Mixed report, the rating agency now has a mixed view on the sector, holding a steady outlook for market-leading diversified universities while being negative on the rest of the sector.

"Many of the credit challenges outlined in our January outlook for 2012 have intensified. 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," said Eva Bogaty, Moody's assistant vice president and author of the report.

She also explained that a minority of market-leading universities, largely those rated ‘Aaa’ or ‘Aa,’ has strong enough balance sheets and diversified revenue sources to still be both "resilient and stable" despite the sector's rising credit risks.

On the other hand, most of the Moody's-rated institutions are more reliant on student tuition, government funding, or both, thus are under additional credit pressure. Other risks that the mid-year report noted are the increased use 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," Bogaty said. "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."

These concerns are echoed in other reports that were released about the sector lately. In a Bank of America Merrill Lynch report on July 20, analysts discussed the recent reports published by the Federal government, Federal regulators and Sallie Mae.

They said that each report looked at different aspects of post-high school education such as college enrollment, college costs, and sources of college funding.

Analysts said that the reports did not hold any "real surprises." To varying degrees, the reports showed college costs, enrollment levels and that the number of degrees conferred are still rising.

However, despite these challenges analysts view on the sector remains positive for most senior FFELP and private student loan ABS.

Even though investors actually benefitted from not moving into private student loans earlier, they said that current spread levels should renew buyers’ focus in the sector, particularly as spreads on CLOs and CMBS have moved to tighter levels.

A 10-basis-point spread tightening in CLOs moved the incremental spread/yield provided by private student loan ABS to 40 basis points, which analysts said is the widest level since October 22, 2010. Similarly, a 15-basis-point  tightening in CMBS A4 notes moved the incremental spread/yield offered by private student loan ABS to 105 basis points, analysts said.

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