Colleges Fail U.S. Financial Test

Latest data from Education Department show scores of private institutions failing to meet disputed metrics aimed at measuring "financial responsibility."
October 13, 2011

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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