Do Financial Responsibility Scores Predict College Closures?

The U.S. Department of Education’s Office of Federal Student Aid quietly released data on the financial responsibility scores of private nonprofit and for-profit colleges earlier this week, something that they have done for each of the last nine years. These scores, which can range from -1.0 to 3.0, are designed to represent a college’s financial health (although some colleges dispute the value of these scores). A score of 1.5 or above represents a passing score, meaning colleges can receive federal financial aid dollars without any additional restrictions.

Colleges scoring 0.9 or below fail the financial responsibility test and must submit a letter of credit to the Department of Education and submit to additional oversight in order to receive federal funds, while colleges scoring between 1.0 and 1.4 receive additional oversight but do not have to submit a letter of credit. Colleges in the worst financial shape may not even receive a score, as the Department of Education can instead choose to place a college under heightened cash monitoring rules (similar to the penalties for failing) without even doing the calculations.

In the newly-released data for the 2014-15 fiscal year, 187 colleges failed, 139 were in the oversight zone, while 3,048 passed unconditionally. The number of failures is the lowest on record, while the number in the oversight zone is also relatively low compared to past years. But at the same time, the rate of college closures increased sharply last year. Does this mean that financial responsibility scores are identifying financially struggling colleges, or is the metric incorrectly identifying colleges at risk of closure as being financially stable?

To answer this question, I used the best existing database of college closures—from Ray Brown’s College History Garden blog. (Check it out!) I examined the fourteen accredited private nonprofit colleges that closed in 2016 to see what the college’s financial responsibility score was in the 2014-15 fiscal year. (For colleges without a score, I checked the heightened cash monitoring (HCM) list as of September 1, 2015.) The results are below.

Two of the 14 colleges did not show up as either having a financial responsibility score or being under HCM, while three other colleges were on HCM due to financial issues and did not receive a financial responsibility score. Of the other nine colleges, four received a passing financial responsibility score (the Ohio College of Massotherapy received the same score as Yale), two were in the additional oversight zone, and three failed. This suggests that either financial conditions changed considerably between mid-2015 and 2016 for some colleges or that financial responsibility scores are an imperfect measure of a college’s fiscal health.

Author: Robert

I am an a professor at the University of Tennessee, Knoxville who studies higher education finance, accountability policies and practices, and student financial aid. All opinions expressed here are my own. View all posts by Robert