New Gauge of Colleges’ Financial Health Comes Up Short

Forbes magazine is the latest to weigh in on the financial health of colleges, with its new “Forbes College Financial Grades” joining the ranks of the credit-rating agencies, the U.S. Department of Education, and consultants like Bain & Company.

In its August 13 issue, the magazine offers financial grades running from A-plus to D for 925 private, nonprofit colleges based on a nine-part formula it created. The formula takes into account factors like the level of a college’s dependence on tuition and the size of its operating surplus (or deficit). The magazine also assigned GPA-style scores to each of the colleges (41 institutions were awarded the highest score of 4.5; 381 received an A or a B, and the rest got C’s or D’s).

We asked a few experts on college financing to weigh in on the approach. They were more than a little skeptical (although seemingly less so than they were about the Bain report in July 2012).

For one, says Susan M. Menditto, director of accounting policy for the National Association of College and University Business Officers, the formula seems off target in its assessment of operating margins because it appears to give too much weight to the value of the endowment at the end of the fiscal year. The money colleges spend from endowments is an important factor in their financial health, but figures based on market fluctuations are less so, Ms. Menditto says.

She also took issue with the data source. Forbes drew on data colleges provided to the Education Department’s Integrated Postsecondary Education Data System, or Ipeds, for the 2010 and 2011 fiscal years.

When considering the finances of a modern college, the Ipeds database is a notoriously imperfect source for figures on such things as overall debt, she says, because Ipeds data include only debt for property, plant, and equipment. If you want to know an institution’s total debt, Ms. Menditto says, “you can’t get that from Ipeds.” In rankings like the one Forbes has undertaken, “a healthy school that is using debt creatively might get penalized,” she says.

Harold V. Hartley III, a senior vice president at the Council of Independent Colleges, says using audited financial statements from colleges would be a “far better and more accurate” way to calculate a rankings. Those are the documents the Department of Education uses to compile its annual “financial responsibility” scores. But then again, it has the power to compel colleges to provide that information. Magazines don’t.

Sarah A. Flanagan, who deals extensively with those scores as vice president for government relations and policy at the National Association of Independent Colleges and Universities, says the Forbes rankings might do more harm than good.

Colleges that deliver education less expensively or that try to keep tuition low by not putting extra cash into reserves get penalized by the magazine’s formula, she says. ”In that sense, the report card is a cost driver in the same way the U.S. News ranking can be.”

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