ED Releases Financial Responsibility Scores for FY15
The Department of Education has released the composite scores for FY15 calculated for institutions participating in the federal student aid programs.
Under ED’s financial responsibility standard, nonprofit and for-profit colleges and universities with composite scores less than 1.0 are considered not financially responsible and must provide a letter of credit to ED and accept provisional certification in order to continue participating in Title IV aid programs. For FY15, 65 nonprofit institutions fell in this category.
Schools with scores between 1.0 and 1.4 fall under the “zone alternative” and are subject to heightened monitoring. For FY15, 62 nonprofit schools fell in the zone.
Public colleges and universities are not subject to the composite score test.
NACUBO and other associations have long questioned ED’s methodology in calculating the composite scores. Three ratios (primary reserve, equity, and net income) are weighted and combined, resulting in a single score for each school based on its audited financial statements. NACUBO disagrees with ED’s treatment of endowment losses, pension liabilities, pledges, and several other areas.
Two new developments have heightened NACUBO’s concerns about the financial responsibility standard.
First, regulations finalized in the closing months of the Obama administration, and scheduled to take effect July 1, added a number of triggers to the standard that would result in ED recalculating an institution’s composite score.
Second, recent changes to the nonprofit reporting model promulgated by the Financial Accounting Standards Board will make the current ratio definitions obsolete. NACUBO facilitated a meeting between ED officials and FASB staff last summer about the coming changes and other concerns about ED’s interpretation of current accounting standards but is not aware of agency plans to revisit these regulations yet. A few institutions may implement the new reporting model as early as FY17, although they are not required to do so until FY19.
A recent report from the inspector general (IG) at ED reviewed the agency’s record of identifying financially at-risk schools, but it primarily focused on the closure of Corinthian Colleges and did not address NACUBO’s concerns about calculation of the composite score for nonprofit institutions. The IG recommended that ED improve its processes for deciding appeals of its determinations, which NACUBO and the National Association of Independent Colleges and Universities have suggested as well.
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Senior Director, Accounting Policy