All private colleges that award federal student aid must participate in the Department of Education’s financial-responsibility test, which is based on information from their audited financial statements. The department develops a composite score on a scale of 3.0 to minus-1.0, based on financial ratios that measure factors such as net worth, operating losses, and the relationship of assets to liabilities. Institutions with scores of 1.5 to 3 pass.
In addition to being subject to extra monitoring, those with scores below 1.0 are required to post a letter of credit with the department equal to 10 percent of the federal student aid that goes to their students annually.
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