• Athletics adds another headwind for midsized and smaller colleges
• Growing short-term borrowing needs, weak deal demand can signal constraints
• Deferred campus investment can weaken recruitment, raise long-term credit risk

New athlete payment obligations are arriving as muni investors see a widening financial divide between stronger universities and tuition dependent schools, market sources told Debtwire.

College sports are another headwind for midsized and smaller schools facing broad budget constraints, said Ryan Ciavarelli, senior vice president, credit research at Belle Haven Investments, noting that those payments can be difficult to isolate from broader employee costs in determining where the pressure comes from.

A federal judge on 6 June 2025 approved the House settlement, which permitted Division I colleges to share up to USD 20.5m with student-athletes beginning in the 2025-26 academic year.

As universities face the new costs, investors are also scrutinizing the security packages behind their bonds and the revenues or assets pledged to bondholders, Ciavarelli said.

Colleges contributed USD 7.2bn to Division I athletics in 2023-24, before revenue sharing began, while 94% of programs spent more than they generated in revenue, according to a July report from the US Government Accountability Office.

Lawmakers are now seeking to stabilize college sports by setting national rules for athlete compensation and allowing schools to pool media rights.

The measure — which passed the Senate on 28 September and was received in the House on 5 October — would also allow eligible institutions to spend up to USD 22.5m annually above the House settlement cap to retain athletes.

Borrowing capacity diverges

These new athlete payments come at a time when some universities are already contending with broader financial strains, including enrollment challenges and rising expenses.

Smaller tuition dependent institutions face the greatest pressure as competition for traditional college age students intensifies, said Joe Gotelli, vice president, senior portfolio manager and head of the municipal markets team at American Century Investments.

Many of these institutions are relying on larger tuition discounts to fill seats, squeezing margins and financial flexibility as costs rise, Gotelli said. Most can still borrow, but financing is often more expensive and investor interest weaker; in some cases, access to capital itself becomes the issue, he added.

In 2024, the Western Interstate Commission for Higher Education projected a 13% decline in US high school graduates from an expected 2025 peak through 2041.

Bond offerings to fund capital projects aimed at stabilizing enrollment can raise red flags with investors when issuers lack a clear execution plan, Ciavarelli said.

Drawing down financial resources for capital spending, growing short term borrowing needs and deals struggling to attract enough investor orders can signal constrained borrowing capacity, he added.

Flagship public universities, major research universities and highly selective private institutions, by contrast, retain solid capital access because of strong demand, deep liquidity, diversified revenue and fundraising support, Gotelli said.

Those advantages allow them to keep investing in facilities, technology and the student experience, he added.

Campus deferrals can weaken competitiveness

To preserve liquidity, some weaker institutions are selling assets, pursuing public-private partnerships or deferring capital projects, Gotelli said.

Such delays can create long-term credit risk, particularly at smaller regional campuses where the average age of facilities continues to rise, Ciavarelli said. Aging laboratories, student housing and dining halls can weaken their competitive position in attracting similar pools of applicants.

Debt-funded campus transformations have produced mixed results over the past decade, Ciavarelli said. Some helped stabilize enrollment, while others came too late and added pressure to operating budgets.

The widening credit differentiation is also creating opportunities for active managers, Gotelli said. A high-quality university that has cheapened on negative headlines may offer a better opportunity than simply chasing yield.

The challenge is distinguishing schools facing temporary policy noise from those facing longer-term enrollment and financial pressures, he added.