Private-College Group Launches New Salvo on Education Department's 'Financial Responsibility' Test

November 29, 2012

The National Association of Independent Colleges and Universities has renewed its critique of the U.S. Department of Education's annual "financial responsibility" scores. The private-college association argues in a report issued this month that the department's continued use of outdated accounting principles and its "pervasive misinterpretation" of its own rules have unfairly damaged colleges' reputations and their bottom lines.

The report, which Naicu delivered to the under secretary of education, Martha J. Kanter, this month and to its own members this week, highlights many of the same concerns that the private-college association and other groups first raised publicly more than a year ago.

The scores are based on financial information derived from colleges' annual audits. Colleges that fail to earn a high enough score can be barred from participating in federal financial-aid programs, or be required to post letters of credit—which can be costly—in order to continue to participate.

The department has been required to assess colleges' financial responsibility since the late 1980s to guard, as the Naicu report puts it, "against the precipitous or sudden" closure of a college because of weak finances. Such closures could leave students in the lurch and taxpayers on the hook for financial aid paid out to the college.

While the formula now used to calculate financial-responsibility scores was developed in the mid-1990s with broad input from colleges, Naicu's report says "it is no longer clear that the current regulatory process is meeting its intended goal."

The 32-page report also recommends six changes the association would like the department to make, including the creation of a "uniform appeals process" that would be part of the score-calculating process, so that colleges could have a chance to correct or update financial information before their scores were finalized and made public.

The private-college association says that publicity about the scores­­—which were not commonly publicized until The Chronicle first obtained them through the Freedom of Information Act and published them in 2009—creates bad publicity for colleges that is sometimes unfounded. (Since 2009, the department has formally released the scores on its own; the latest set of scores, based on the 2011 fiscal year, are expected to be released in December.)

The report also recommends that the department make better use of a rule that allows it to look beyond its calculations and to examine a college's total financial circumstances before assessing penalties. If the government were "to step back" and assess whether a score came out lower because of an unusual circumstance that doesn't really pose a threat to a college's financial standing, the department could avoid "labeling it as a failure, and causing the institution to incur unnecessary expenses or suffer adverse public relations," the report says.

A department spokeswoman said she was not immediately able to comment on the report's criticism of the agency or its recommendations.