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Colleges Fail U.S. Financial Test

October 13, 2011

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WASHINGTON -- Scores of private nonprofit colleges, and dozens of for-profit institutions, failed the federal government's disputed test aimed at measuring the "financial responsibility" of postsecondary institutions, according to data for 2010 released by the U.S. Education Department Wednesday. The number of colleges on the list stayed roughly constant compared to 2009.

The test, which is one of several standards that the government uses to gauge whether a college is financially strong enough to participate in the federal student aid programs, is based on three ratios drawn from an institution’s audited financial statements -- a primary reserve ratio, an equity ratio, and a net income ratio.

Institutions that score above 1.5 (on a scale of 3.0) are considered to be financially responsible; those below 1.5 but above 1.0 require some additional oversight, while those below 1.0 must post a letter of credit and face cash monitoring requirements from the department.

An initial review of the list shows slightly more than 180 private nonprofit colleges with scores below 1.5, and about 100 of those with scores below 1.0. About 200 for-profit colleges -- many of them in fields such as cosmetology -- fall below the 1.5 threshold. A spreadsheet containing the institutions' scores can be downloaded here.

College leaders have complained that the federal government's test is an inaccurate, if not unfair, measure of institutions' overall financial health. The National Association of Independent Colleges and Universities, the National Association of College and University Business Officers and the Council of Independent Colleges have established a panel to study "the accuracy and reliability of the financial responsibility test," and hope its recommendations will prompt changes in the federal standard.

In a statement Wednesday, the National Association of Independent Colleges and Universities said it had expected the number of institutions falling short of the financial responsibility test to fall in 2010, given the upturn in the stock market (an in turn university endowments) that year.

The group attributed the slightly higher numbers in part to the fact that the department examined more colleges in 2010 than in 2009. "While the number of private nonprofit colleges that failed the department’s test grew by 5.2 percent, the overall number evaluated by the department increased at a higher rate of 7.6 percent," the NAICU statement said.

NAICU also discouraged reading too much into an institution's appearance on this list.

"Inclusion on the list does not mean a college is in danger of closing," the group said. "The overwhelming majority of institutions that have appeared on the list in previous years continue to provide a quality education to their students. Students and parents who are concerned about a college’s inclusion on the list should talk to the school about the reasons for it.

"Like many families, businesses, and other organizations, all colleges are addressing the challenges brought by the nation’s financial crisis and ongoing economic uncertainty. Colleges on the list, and others nationwide, are taking proactive steps -- including cutting costs and enhancing efficiency -- to improve their balance sheets."

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Comments on Colleges Fail U.S. Financial Test

  • Rating the financial strength of colleges
  • Posted by feudi pandola , FAO on October 13, 2011 at 12:15pm UTC
  • I've never understood the need for the battery of financial ratio tests that the Department of Education uses in rating colleges financial stability. Each audit includes an auditors opinion that uses standards from the AICPA in measuring whether a school is a going concern, or has financial problems. If the AICPA standards are not sufficient, then why even have the audit or the AICPA?

    Sounds like more over regulation at the federal level for no discernible purpose except to feed the bureaucracy.
  • Sample or exhaustive
  • Posted by IHE Reader on October 13, 2011 at 12:30pm UTC
  • Does anyone know if the spreadsheet represents just a sample of schools or whether it should be exhaustive? If the latter, I wonder why some schools aren't on the list.
  • Posted by Glen S. McGhee , Dir., at Florida Higher Education Accountability Project on October 13, 2011 at 2:45pm UTC
  • Looking over the listed colleges, most would be considered vo-tech schools if not for the fact that they receive federal funds. Many are tiny, mom-and-pop operations that only offer certificates, not degrees. Furthermore, they are nationally accredited, and licensed by the state.

    Thus, financial ratios are skewed. A more realistic approach would be to survey all eligible schools together, not just the vocational-technical schools.

    Another result often cited using this particular methodology are the supposedly extremely low federal student aid/loan program participation rates for community colleges. In both cases, we need to look more carefully at the sample population.
  • Private Only
  • Posted by A Prof on October 13, 2011 at 3:00pm UTC
  • If you are looking for a certain school and it is on the list, make sure if it is public or private. This ranking is only for private colleges.
  • from the Department of Roadblocks
  • Posted by DS on October 13, 2011 at 3:45pm UTC
  • The US Dept of Ed's obvious goal these days is to conconct new and creative ways to reduce the number of students receiving federal financial aid. Whether it's devising a formula like this, or trying to scare students off from certain schools by displaying skewed graduation statistics on the FAFSA website, or the extremely misleading net price calculator, or the draconian new Satisfactory Academic Progress regulations, the common theme is "let's reduce the number of aid recipients or discourage attendance altogether." And these new initiatives are often not even brought about by statutory changes or requirements.

    The President keeps saying that we need more college graduates in order to remain competitive. Yet his own Dept of Ed comes up with 1001 roadblocks to this goal. Yes, many want to see government spending reduced, but if ever there was a penny wise pound foolish way to reduce the deficit, less financial aid is it, because these types of initiatives will do unimagineable damage to upward mobility.
  • Apples / Oranges
  • Posted by Kuba , Asst. Prof. on October 13, 2011 at 4:30pm UTC
  • The problem is the Department of Ed is using a business world matrix to measure a labor intensive environment. Our product is “learning” not “stuff”. We all know it is easier to measure the psychomotor domain than the cognitive and/or affective domains. I got a novel idea. Why doesn’t the Department of Ed use the same metrics to measure their productivity / cost effectiveness?