NACUBO Urges Review of Financial Responsibility Standards
July 14, 2009
NACUBO expressed concern that the current financial responsibility test used by the Department of Education lacks the flexibility needed to accommodate extraordinary market downturns and other atypical financial events in testimony submitted as part of public hearings held by ED in June. NACUBO offered to work with ED, national and regional accounting firms, and institutional representatives over the next two months to develop recommendations for modifications. Any regulatory changes deemed necessary could be considered as part of the agenda for the negotiated rulemaking committee to be appointed this fall, suggested the association.
Under the financial responsibility standards in Subpart L of 34 CFR 668, nonprofit and for-profit colleges and universities must meet or exceed a certain threshold on a composite score in order to be eligible to participate in the Title IV student loan programs. The composite score weighs and combines three ratios--primary reserve, equity, and net income--that measure different aspects of financial health. NACUBO Advisory Report 98-1 explains the standards in detail.
NACUBO is concerned that a combination of market downturns, changes in accounting rules, and the tight credit market will push many more institutions below the requisite composite score in FY2008 and FY2009, even though the institutions remain economically viable. At the same time, one of the "cures" for failing the test--obtaining a letter of credit equal to 50 percent of its Title IV expenditures (or 10 percent with provisional certification)--will be harder and more expensive to get.
Business officers at nonprofit colleges and universities should pay close attention to these ratios. They are designed to be calculated directly from the institution's audited financial statements. If you are concerned about ED calculations, or would like NACUBO to verify or assist with the calculation, please contact Sue Menditto, director of accounting policy.
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