149 Nonprofit Colleges Fail Education Department's Test of Financial Strength

August 11, 2010

A total of 149 private nonprofit colleges failed the U.S. Department of Education's "financial-responsibility test" based on their condition in the 2009 fiscal year, data released on Thursday show. That's 23 more than the 126 that failed the test in the 2008 fiscal year, and an increase of about 70 percent over the number of degree-granting institutions that failed two years ago.

Chronicle Chart: See which colleges failed to make the grade.

The colleges include small, religious institutions like Crossroads College, in Minnesota, and Concordia Seminary, in Missouri; specialized institutions like the Pennsylvania Academy of the Fine Arts, the Milwaukee Institute of Art & Design, and the Dorothea Hopfer School of Nursing, at Mount Vernon Hospital, in New York; and several residential and liberal-arts colleges, including Belmont Abbey, Bethel, Guilford, Harcum, Keuka, and Ripon.

Among for-profit colleges, 37 failed the test for 2009, 11 fewer than for 2007. Nine of them had the lowest possible score.

Colleges that fail the test are subject to additional federal scrutiny of student-aid funds and, in cases of the lowest scores, extra financial obligations.

More than a third of the nonprofit colleges that failed the test in 2009 are located in nine states in the Midwest, with 13 in Illinois, the analysis showed. Another 13 are in Pennsylvania, 12 in New York, and 11 in California. (See interactive map for details on past three years.)

A Chronicle analysis also found that 34 of the nonprofit institutions on the list for 2009 failed the test in each of the previous two years as well. (The accompanying interactive table shows scores for all degree-granting institutions that failed the test in any of the three years, as well as the number of years in which they've done so.)

Failing the test is typically an indicator of a college's overall financial fragility. But for 2009, several of the nonprofit institutions said their presence on the list was due chiefly to steep declines in their endowment values. "If the market hadn't gone down, we wouldn't be a one," said Mary M. de Regnier, vice president for finance at Ripon College, referring to its score. Ripon fell below the passing score of 1.5 but above the level at which it would be required to post a letter of credit with the Department of Education. The college said it could do so without hurting its liquidity.

Rockhurst University, in Missouri, which scored 0.9, said endowment losses, the way it accounts for interest contracts on its debt, and a training company it owns that "racked up a loss last year," as the economy faltered, were all factors in its low score. "We'll be better this year," said Guy Swanson, vice president for business and finance.

Scores, which run from minus 1.0 to 3, are based on a calculation that takes several factors into account, including debt, assets, and operating deficits and surpluses.

Takeover Targets?

A failing score has also become a signal to investors that an institution could be ripe for a for-profit takeover. At least one of the colleges that appeared on the list of "failed" institutions first published by The Chronicle, in June 2009, doesn't appear on the list for the 2009 fiscal year; the institution, National Hispanic University, in California, was sold to Laureate Education Inc. Waldorf College, in Iowa was also sold. Its purchase, by the for-profit Columbia Southern University took place after the end of the fiscal year and the college appears on the nonprofit list for 2009.

The list for 2009 includes Dana College, in Nebraska, which recently announced that it would close, after its accreditor said it would not automatically continue its accreditation under the corporate owners that had hoped to buy it. (Two other institutions known to be in talks with buyers, Lambuth University, in Tennessee, and Rochester College, in Michigan, don't appear in the Education Department's data files for 2009, presumably because they are among the 115 or so degree-granting for-profit and nonprofit institutions whose scores are still being processed by the department.)

Last year the Chronicle obtained its list of 114 degree-granting nonprofit institutions in response to a Freedom of Information Act request. That list was based on Education Department data that did not reflect all colleges' most current fiscal year, or adjustments to scores the department was in the process of compiling. This year the department did not release scores until all colleges had submitted current information and had a chance to resolve questions about their scores. )

In addition, the department also released all scores for all nonprofit and for-profit colleges for the previous two years. The information is available at the department's data center Web site. Officials said they were releasing the data to give the public more information about colleges and in response to the interest resulting from the Chronicle's publication of the list last year. Public colleges, because of their government support, typically aren't subject to the assessment, which is designed to assure taxpayers that their money is not at risk.

Colleges that score 1 to 1.4 on the test are considered to have failed but are "in the zone," meaning they can continue to participate in federal financial-aid programs, but with restrictions on how student-aid funds are disbursed to them.

Colleges with scores below 1 are subject to extra requirements. They must post letters of credit equal to at least 10 percent of the federal student-aid funds they receive and face additional restrictions, or post letters of credit equal to at least 50 percent of the funds they receive and operate as if they had passed the test. Colleges that score 1 through 1.4 for three consecutive years become subject to the extra requirements.

Department officials said they rarely kicked colleges out of student-aid programs altogether, because the restrictions and letter-of-credit requirements are adequate protections for taxpayers' money if a college falls into dire financial straits.

In 2009 more than half of the failing nonprofit colleges—80 of them—scored low enough to trigger the extra requirements, up from 71 in 2008 and 48 in 2007. Among for-profit colleges, the trend was reversed; 24 scored that low in 2009, down from 33 in 2008 and 39 in 2007.

Trying to Improve

Several of the colleges with low scores said they were taking steps to improve their financial situation. A branch of City College, in Casselberry, Fla., scored the lowest possible score in each of the past three years. The college's lawyer said that it had been a separately owned two-year institution managed by City College, but that this year City College has absorbed it, and its enrollment, which had fallen to about 73 in 2006, is now above 300.

Officials of Ave Maria School of Law, which has failed the test for three years and had a score of minus 0.9 in 2009, issued a statement that its relocation to Naples, Fla., was helping to improve both its appeal to students and its fund raising. The law school, which has graduated just seven classes, said that its asset-to-debt ratio was still low, but that it expected the ratio to "reverse itself over time" as the school builds its endowment.

The vice president for finance at Eureka College, Marc P. Pasteris, said the Illinois institution has struggled with finances for decades and had been on course for a turnaround since 2005, under a tuition-pricing plan designed to eliminate most discounts, and improve retention. In the previous two years, Eureka reached scores of 1.4, but it fell to 0.8 in 2009 because of endowment losses. "We are not out of the woods," Mr. Pasteris said, "but on the right track."

As in the past, some institutions end up being subject to extra scrutiny by the department or additional student-aid-disbursement requirements because of the way the department accounts for particular transactions.

The president of Bryant & Stratton College, one of the for-profit institutions that reached the list in 2009 (with a score of 0.2), said it did so because of the way it accounts for the capital brought in by new investors and the equity granted to them.

A nonprofit, Alliant International University, said a building on its San Francisco campus, which it sold a few years ago and is now leasing back from the owner, pushed down its score. Alliant appeared on the list last year with a score of 1.4 and this year with 1.3. It's "not a list we want to be on," said Geoffrey M. Cox, the president.

In a recent Chronicle commentary, Mr. Cox noted that his university had received at least six unsolicited inquiries from investors in the past few months. It's not interested in selling itself, he added.

August 13, 2010: This article has been revised to reflect the following correction: Because of inaccurate information provided by the Education Department, Harding College, in Arkansas, was mistakenly included on the list of institutions that failed the department's test of financial strength in 2008-9. Harding received a composite score of 1.7, not 1.1, and has been removed from the list.