180 Private Colleges Fail Education Dept.'s Latest Financial-Responsibility Test

October 12, 2011

A total of 150 private nonprofit colleges failed the U.S. Department of Education's most recent financial-responsibility test, which covers the 2010 fiscal year, according to data released by the department on Wednesday. More than half of them scored so low that they will be required to post letters of credit to remain eligible to participate in the federal student-aid programs.

The number of failing nonprofit colleges is about the same as in 2009. Among for-profit colleges, 30 failed the test in 2010, seven fewer than in the previous year.

Financial-responsibility scores, which are derived from the audited financial statements that colleges submit annually to the department, are supposed to offer a broad measure of colleges' financial health. By placing restrictions on failing programs, the department seeks to protect students and taxpayers from colleges at risk of financial collapse.

But the test has come under growing scrutiny from accounting experts and higher-education associations, who say the scores are often inaccurate and misleading. They accuse the government of misapplying its own rules and are pressing the department to re-examine how it calculates the scores. The department has said it is willing to consider changes to the formula, but maintains that it applies its rules consistently.

The government has been producing financial-responsibility scores since 1998, but it did not make them public until two years ago, after The Chronicle requested them.

The scores, which run from minus-1.0 to 3.0, are based on a calculation that weighs debt, assets, and operating deficits and surpluses, among other factors. Colleges that score between 1.0 and 1.4 on the test are subject to cash monitoring and other oversight. Those that score less than 1.0 are required to post letters of credit equal to at least 10 percent of the federal student aid they received in the most-recent year.

The increase in the number of failing nonprofit colleges in the latest scores came as something of a surprise to the National Association of Independent Colleges and Universities, which had expected the number to drop as endowments rebounded from their 2009 lows. Instead, the list grew by one institution, and the number of colleges with scores below 1.0 increased by eight.

In a statement, the association urged students not to rule out colleges that had made the list, stressing that inclusion "does not mean a college is in danger of closing."

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