By Scott Carlson

Moody's Investors Service says the outlook for a relatively small number of well-managed, diversified colleges looks stable in 2011, an upgrade from the negative forecasts that the credit-rating agency has given higher education over the past couple of years.

In its latest outlook report, however, Moody's maintains a negative outlook for the majority of higher-education institutions, which it says are too dependent on tuition, auxiliary income, and state support.

The Moody's report, "2011 Outlook for U.S. Higher Education," which will be available from the company to its subscribers this week, highlights a widening gap between have and have-not colleges.

"This outlook speaks to the fact that the strong continue to get stronger," said Kimberly Tuby, a vice president and senior analyst at Moody's who is the author of the report.

Institutions that already have large, well-established research programs and strong philanthropic support are pulling through the economic downturn relatively well, she said. The strongest institutions are in top demand and have fingers in a number of business lines.

Meanwhile, the weakest institutions—which draw students from a regional base and lack diversity in business lines—could still be endangered. Those institutions are generally small or mid-sized and do not have a robust fund-raising capacity. "We could see some of those merging or being absorbed by larger institutions, or even going out of business," Ms. Tuby said.

The report points to three "critical credit factors" that drive the 2011 outlook for colleges:

• "Weakened prospects for net tuition growth" because of a market preference for low-cost or high-reputation competitors.
• "Differing degrees of pressure on nontuition revenues," such as philanthropy or research money.
• A "need for stronger management of operating costs, balance-sheet risks, and capital plans."

The report takes a look at the future of various revenue sources and business lines that colleges are involved in, and offers some outlooks: Philanthropy has declined but will remain an important source of income for institutions. Funds for research, which have flattened, will be likely to go to well-established research universities and not to smaller organizations looking to expand research. Health-care operations will be under financial pressure, although those linked to research institutions will be better off.

The drying up of stimulus money will highlight the different management strategies that public colleges took with those funds, Ms. Tuby said. Institutions that viewed the stimulus as a temporary relief and an opportunity to start reducing expenses and ratcheting up income, including raising tuition, will be in a much better position than will colleges that made few adjustments during the reprieve.

Although the report says that smaller private colleges would be under the most intense pressure among higher-education institutions, it notes that the best-managed institutions have opportunities to thrive in the current market. "These organizations tend to be more nimble and entrepreneurial than is generally realized, and some are adapting new technology, entering new partnerships, expanding into new markets, and encouraging faculty to be more productive," the report says.

It all comes down to a smart administration and a good board of trustees, Ms. Tuby stressed.

"We're really trying to emphasize throughout that governance and management is a key underpinning to credit quality in a not-for-profit sector," she said.