Analyzing the Heightened Cash Monitoring Data Release

NOTE: This post was updated April 3 to reflect the Department of Education’s latest release of data on heightened cash monitoring.

In my previous post, I wrote about the U.S. Department of Education’s release of a list of 544 colleges subject to heightened cash monitoring standards due to various academic, financial, and administrative concerns. I constructed a dataset of the 512 U.S. colleges known to be facing heightened cash monitoring (HCM) along with two other key accountability measures: the percentage of students who default on loans within three years (cohort default rates) and an additional measure of private colleges’ financial strength (financial responsibility scores). In this post, I examine the reasons why colleges face heightened cash monitoring, as well as whether HCM correlates with the other accountability metrics.

The table below shows the number of colleges facing HCM-1 (shorter delays in ED’s disbursement of student financial aid dollars, although colleges not facing HCM have no delays) and HCM-2 (longer delays) by type of institution (public, private nonprofit, and for-profit).

Table 1: HCM status by institutional type.
Sector HCM-1 HCM-2
Public 68 6
Private nonprofit 97 18
Private for-profit 284 39
Total 449 63

 

While only six of 74 public colleges are facing HCM-2, more than one in ten private nonprofit (18 of 115) and for-profit colleges (39 of 323) are facing this higher standard of oversight. The next table shows the various reasons listed for why colleges are facing HCM.

Table 2: HCM status by reason for additional oversight.
Reason HCM-1 HCM-2
Low financial responsibility score 320 4
Financial statements late 66 9
Program review 1 21
Administrative capability 22 7
Accreditation concerns 1 12
Other 39 10

 

More than two-thirds (320) of the 449 colleges facing HCM-1 are included due to low financial responsibility scores (below a 1.5 on a scale ranging from -1 to 3), but only four colleges are facing HCM-2 for that reason. The next most common reason, affecting 75 colleges, is a delayed submission of required financial statements or audits. This affected 43 public colleges in Minnesota, which are a majority of the public colleges subject to HCM. Program review concerns were a main factor for HCM-2, with 21 colleges in this category (including many newly released institutions) facing HCM-2. Other serious concerns included administrative capability (22 in HCM-1 and 7 in HCM-2), accreditation (2 in HCM-1 and 12 in HCM-2), and a range of other factors (39 in HCM-1 and 10 in HCM-2).

The next table includes three of the most common or serious reasons for facing HCM (low financial responsibility scores, administrative capacity concerns, and accreditation issues) and examines their median financial responsibility scores and cohort default rates.

Table 3: Median outcome values on other accountability metrics.
Reason for inclusion in HCM Financial responsibility score Cohort default rate
Low financial responsibility score 1.2 12.1%
Administrative capability 1.6 20.3%
Accreditation issues 2.0 2.8%

 

Not surprisingly, the typical college subject to HCM for a low financial responsibility score had a financial responsibility score of 1.2 in Fiscal Year 2012, which would require additional federal oversight. Although the median cohort default rate was 12.1%, which is slightly lower than the national default rate of 13.7%, some of these colleges do not participate in the federal student loan program and are thus counted as zeroes. The median college with administrative capability concerns barely passed the financial responsibility test (with a score of 1.6), while 20.3% of students defaulted. Colleges with accreditation issues (either academic or financial) had higher financial responsibility scores (2.0) and lower cohort default rates (2.8%).

What does this release of heightened cash monitoring data tell us? Since most colleges are on the list for known concerns (low financial responsibility scores or accreditation issues) or rather silly errors (forgetting to submit financial statements on time), the value is fairly limited. But there is still some value, particularly in the administrative capability category. These colleges deserve additional scrutiny, and the release of this list will do just that.

New Data on Heightened Cash Monitoring and Accountability Policies

Earlier this week, I wrote about the U.S. Department of Education’s pending release of a list of colleges that are currently subject to heightened cash monitoring requirements. On Tuesday morning, ED released the list of 556 colleges (updated to 544 on Friday), thanks to dogged reporting by Michael Stratford at Inside Higher Ed (see his take on the release here).

My interest lies in comparing the colleges facing heightened cash monitoring (HCM) to two other key accountability measures: the percentage of students who default on loans within three years (cohort default rates) and an additional measure of private colleges’ financial strength (financial responsibility scores). I have compiled a dataset with all of the domestic colleges known to be facing HCM, their cohort default rates, and their financial responsibility scores.

That dataset is available for download on my site, and I hope it is useful for those interested in examining these new data on federal accountability policies. I will have a follow-up post with a detailed analysis, but at this point it is more important for me to get the data out in a convenient form to researchers, policymakers, and the public.

DOWNLOAD the dataset here.

Why is it So Difficult to Sanction Colleges for Poor Performance?

The U.S. Department of Education has the ability to sanction colleges for poor performance in several ways. A few weeks ago, I wrote about ED’s most recent release of financial responsibility scores, which require colleges deemed financially unstable to post a bond with the federal government before receiving financial aid dollars. ED can also strip a college’s federal financial aid eligibility if too high of a percentage of students default on their federal loans, if data are not provided on key measures such as graduation rates, or if laws such as Title IX (prohibiting discrimination based on sex) are not followed.

The Department of Education can also sanction colleges by placing them on Heightened Cash Monitoring (HCM), requiring additional documentation and a hold on funds before student financial aid dollars are released. Corinthian Colleges, which partially collapsed last summer, blames suddenly imposed HCM requirements for its collapse as they were left short on cash. Notably, ED has the authority to determine which colleges should face HCM without relying upon a fixed and transparent formula.

In spite of the power of the HCM designation, ED has previously refused to release a list of which colleges are subject to HCM. The outstanding Michael Stratford at Inside Higher Ed tried to get the list for nearly a year through a Freedom of Information Act request (which was mainly denied due to concerns about hurting colleges’ market positions), finally making this dispute public in an article last week. This sunlight proved to be a powerful disinfectant, as ED relinquished late Friday and will publish a list of the names this week.

The concerns about releasing HCM scores is but one of many difficulties the Department of Education has had in sanctioning colleges for poor performance across different dimensions. Last fall, the cohort default rate measures were tweaked at the last minute, which had the effect of allowing more colleges to pass and retain access to federal aid. Financial responsibility scores have been challenged over concerns that ED’s calculations are incorrect. Gainful employment metrics are still tied up in court, and tying any federal aid dollars to college ratings appears to have no chance of passing Congress at this point. Notably, these sanctions are rarely due to direct concerns about academics, as academic matters are left to accreditors.

Why is it so difficult to sanction poorly-performing colleges, and why is the Department of Education so hesitant to release performance data? I suggest three reasons below, and I would love to hear your thoughts in the comments section.

(1) The first reason is the classic political science axiom of concentrated benefits (to colleges) and diffuse costs (to students and the general public). Since there is a college in every Congressional district (Andrew Kelly at AEI shows the median district had 11 colleges in 2011-12), colleges and their professional associations can put forth a fight whenever they feel threatened.

(2) Some of these accountability measures are either all-or-nothing in nature (such as default rates) or incredibly costly for financially struggling colleges (HCM or posting a letter of credit for a low financial responsibility score). More nuanced systems with a sliding scale might make some sanctions possible, and this is a possible reform under Higher Education Act reauthorization.

(3) The complex relationship between accrediting bodies and the Department of Education leaves ED unable to directly sanction colleges for poor academic performance. A 2014 GAO report suggested accrediting bodies also focus more on finances than academics and called for a greater federal role in accreditation, something that will not sit well with colleges.

I look forward to seeing the list of colleges facing Heightened Cash Monitoring be released later this week (please, not Friday afternoon!) and will share my thoughts on the list in a future piece.

The 2015 Net Price Madness Bracket

Every year, I take the 68 teams in the 2015 NCAA Division I men’s basketball tournament and fill out a bracket based on colleges with the lowest net price of attendance (defined as the total cost of attendance less all grant aid received). My 2014 and 2013 brackets are preserved for posterity, with Louisiana-Lafayette and North Carolina A&T emerging victorious for having the lowest net price without having won a single game.

In 2015, the final four teams standing (based on net price) are:

MIDWEST REGION: Wichita State [WINNER] (net price of $9,039*, 46% graduation rate, 36% Pell)

WEST REGION: North Carolina (net price of $11,994, 90% graduation rate, 21% Pell)

[An earlier version of this post incorrectly had BYU beating North Carolina. My apologies for that error, which has been corrected.]

EAST REGION: Wyoming (net price of $11,484, 54% graduation rate, 24% Pell)

SOUTH REGION: San Diego State (net price of $9,856, 66% graduation rate, 40% Pell)

netprice

All data for the bracket can be found here.

*NOTE: Wichita State has a reported net price of $9,039, but the net prices for each household income bracket are higher than $9,039. Something isn’t right here, but what would March Madness be without any controversy?

Indiana deserves special plaudits for having a net price for the lowest-income students of just $4,632—although the 19% Pell enrollment rate is quite low.

Also, thanks to Andy Saultz for catching an error in the VCU/Ohio State game. Much appreciated!

Do Financial Responsibility Scores Reflect Colleges’ Financial Strength?

In spite of the vast majority of federal government operations being closed on Thursday due to snow (it’s been a rough end to winter in this part of the country), the U.S. Department of Education released financial responsibility scores for private nonprofit and for-profit colleges and universities based on 2012-2013 data. These scores are based on calculations designed to measure a college’s financial strength in three key areas: primary reserve ratio (liquidity), equity ratio (ability to borrow additional funds) and net income (profitability or excess revenue).

A college can score between -1 and 3, and colleges that score over 1.5 are considered financially responsible without any qualifications and can access federal funds. Colleges scoring between 1.0 and 1.4 are considered financially responsible and can access federal funds for up to three years, but are subject to additional Department of Education oversight of its financial aid programs. If a college does not improve its score within three years, it will not be considered financially responsible. Colleges scoring 0.9 or below are not considered financially responsible and must submit a letter of credit and be subject to additional oversight to get access to funds. A college can submit a letter of credit equal to 50% of all federal student aid funds received in the prior year and be deemed financially responsible, or it can submit a letter equal to 10% of all funds received and gain access to funds but still not be fully considered financially responsible.

As Goldie Blumenstyk (who knows more about the topic than any other journalist) and Joshua Hatch of The Chronicle of Higher Education discover in their snap analysis of the data, 158 private degree-granting colleges (108 nonprofit and 50 for-profit) failed to pass the test in 2012-13, down ten colleges from last year. Looking at all colleges eligible to receive federal financial aid, 192 failed outright in 2012-13 by scoring 0.9 or lower and an additional 128 faced additional oversight by scoring between 1.0 and 1.4.

But, as Blumenstyk and Hatch note in their piece, private colleges have repeatedly questioned how financial responsibility scores are determined and whether they are accurate measures of a college’s financial health. I’m working on an article examining whether and how colleges and other stakeholders respond to financial responsibility scores and therefore have a bunch of data at the ready to look at this topic.

Thanks to the help of my sharp research assistant Michelle Magno, I have a dataset of 270 private nonprofit colleges with financial responsibility scores and their Moody’s credit ratings in the 2010-11 academic year. (Colleges only have Moody’s ratings if they seek additional capital, which explains the smaller sample size and why few colleges with low financial responsibility scores are included.) The below scatterplot shows the relationship between Moody’s ratings and financial responsibility scores, with credit ratings observed between Caa and Aaa and financial responsibility scores observed between 1.3 and 3.0.

credit_rating

The correlation between the two measures of fiscal health was just 0.038, which is not significantly different from zero. Of the 57 colleges with the maximum financial responsibility score of 3.0, only three colleges (Northwestern, Stanford, and Swarthmore) had the highest possible credit rating of Aaa. Twenty-five colleges with financial responsibility scores of 3.0 had credit ratings of Baa, seven to nine grades lower than Aaa. On the other hand, six of the 15 colleges with Aaa credit ratings (including Harvard and Yale) had financial responsibility scores of 2.2, well below the maximum possible score.

This suggests that the federal government and private credit agencies measure colleges’ financial health in different ways—at least among colleges with the ability to access credit. Financial responsibility scores can certainly have the potential to affect how colleges structure their finances, but it is unclear whether they accurately reflect a college’s ability to operate going forward.