Plan to monitor colleges’ financial health renews oversight debate

Among the most long-standing complaints in higher education is the method by which the U.S. Department of Education tracks the financial health of private nonprofit and for-profit schools. 

The financial responsibility composite score, a measure built into the Higher Education Act, examines colleges’ liquidity, equity and profitability in order to gauge their financial standing and control access to federal financial aid. 

But the measure has been derided for relying on retrospective data that does not reflect the current condition of an institution. Some of the most recently available scores are based on data that is three years old. A U.S. Government Accountability Office report in 2017 found that the composite score predicted only half of college closures since the 2010-11 academic year.

Criticism of the metric has been renewed as the pandemic’s economic fallout ravages college budgets and all but assures the accelerated closure of some precariously positioned institutions. At least 345 private nonprofit colleges could close or merge within six years, predicts Edmit, a college advising company that caught legal flak late last year for trying to publish a list of schools at imminent risk of shutting down. In light of this trend, leaders from across the sector have called for a quicker way to assess colleges’ survivability. 

The new coronavirus relief bill from House Democrats offers one option. It proposes an intricate monitoring system that would give an immediate snapshot of colleges’ finances. It also tries to ensure that institutions struggling the most could wind down operations while minimizing the pain to enrolled students, though the legislation doesn’t mandate closures. 

While the plan improves on the existing process, including by using more recent data, it is still flawed, some higher ed experts say. Eligibility largely hinges on composite scores, a measure in desperate need of an overhaul, they said.

“In a crisis we tend to put a Band-Aid on things,” said Barbara Mistick, president of the National Association of Independent Colleges and Universities (NAICU). “I do worry this is like a Band-Aid for something that has been a bad metric all along.”

A new option for struggling schools

Composite scores were created more than two decades ago to help identify and supervise struggling colleges. Private nonprofit and for-profit institutions are assigned a score between -1 and 3 based on their financial strength. Public colleges are excluded, with the assumption that state assistance would keep them afloat. 

Institutions with a score of 1.5 or above are considered financially responsible. Colleges scoring between 1 and 1.5 can access Title IV funds with additional oversight. Those with a score below 1 risk losing their aid if they don’t post a letter of credit worth at least 10% of the Title IV money they received in the most recent fiscal year.

Democrats’ Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act would offer another route for financially unsteady colleges to stay eligible for aid.

Institutions with a score of less than 1 by the end of fiscal 2019 — or those that anticipate having a similarly poor score the following year — and can’t cover their expenses for more than six months would qualify for the new program. 

Colleges would need to give the U.S. Department of Education an audited assessment of their liquidity levels, as well as two plans. One would detail how institutional records like transcripts would be managed. The other, a teach-out plan, would describe where and how students could finish their studies if the college closed. 

Participating institutions that shut down would release students from all financial holds and couldn’t charge them a fee to access their records within three years of closure, according to the bill. 

Institutions that can’t pay for more than three months of expenses are subject to stricter scrutiny. They must arrange a formalized teach-out agreement that would cover at least 75% of their enrolled students, and report their headcount and liquidity to the department every two weeks.

The proposal is an alternative to the department’s typical oversight process for schools with the lowest scores, which could include posting a letter of credit to remain eligible for aid. Removing that condition could ease some pressure on faltering schools. 

The bill also provides $300 million to help colleges meet the recordkeeping and other requirements that would effectively prepare them to close. And it does not mean to keep a college open if shuttering becomes inevitable.

Limits of the composite score

Liquidity is the best way for the department to judge a college’s financial stability, said Yan Cao, a higher education fellow at The Century Foundation, a liberal think tank. 

But Cao, who recently co-wrote an essay arguing for the department to use liquidity as a barometer for colleges’ health, doesn’t believe the proposal will improve oversight of colleges’ finances in the long term. Rather, it will give the department a rapid way to spot shaky institutions that may be doomed by the pandemic, she said. 

“A broader capture of liquidity data would be more effective,” said Cao, who proposes colleges provide the department with real-time information about their liquidity levels. “This sort of data isn’t captured by the composite score.”

NAICU and the American Council on Education (ACE), on behalf of dozens of higher ed groups, wrote to Education Secretary Betsy DeVos in March asking her to suspend the current financial responsibility standards for three years. Given the economic turbulence colleges will experience as a result of the pandemic, they may be forced “to consider extraordinary financial decisions” to buoy their scores, they wrote.

Because the score’s formula is weighted toward cash on hand and also considers the strength of an institution’s endowment, which fluctuates with the market, colleges may need to cut jobs or institute furloughs to meet the benchmark, Mistick said

ACE’s conservative estimate is that colleges stand to lose at least $47 billion from the pandemic, and it anticipates downturns in state funding and lucrative international enrollment. Institutions have already taken significant budget hits by refunding room and board fees, and they are being sued to return some tuition as well. 

The most recent aid effort by Congress only gave $14 billion to higher ed.

“We need to find solutions that will really manage through this process and help institutions be stronger later,” Mistick said of a new monitoring system.

A cleaner path to closures

The bill’s provisions on colleges with less than three months of liquidity would suggest House Democrats want to guide those institutions to a smooth closure. But absent from the proposal is a timeline under which failing colleges would be forced to shut their doors.

“Congress doesn’t want to be in the position of telling colleges they have to close,” said Ben Miller, vice president for postsecondary education at the left-leaning think tank Center for American Progress. “No one wants to be in that position. It’s a game of hot potato where no one wants to say it’s over.”

That’s because a college closure can be highly disruptive for a community, Miller said. Many institutions serve as major employers and economic engines for the surrounding area. And no one wants to tell students they may need to finish their education elsewhere, at a college that could be far away or not offer their major.

While previous administrations have pledged to rework financial responsibility metrics, none have followed through, Miller said, in part because it would likely be a costly endeavor for the department. The federal government went through an extensive effort with consulting giant KPMG in the 1990s to develop a version of the current monitoring system.

Asked for comment about whether DeVos supported the plan in the HEROES Act, department spokesperson Angela Morabito wrote in an email that the bill “will go nowhere.” The House approved the $3 trillion bill earlier this month, but Senate Republicans have written it off, making it unlikely to pass.

“While the House plays political games, the Secretary remains focused on students during this time – making sure that they can continue to learn, that educators can adapt to meet their needs, and that institutions can continue to teach students,” she wrote.

Without the necessary federal oversight, states may be left to step in, such as when Massachusetts passed a new financial monitoring law for colleges last year after the abrupt closure of Mount Ida College. 

But the pandemic may distract states from those efforts. And some state regulators are not robust enough to launch a monitoring program, Miller said.

“You’ve got some state agencies that are just two people in a back office,” he said. “The good news is that usually they don’t have many colleges, so it’s less of an issue.”

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