In an effort to identify financially struggling colleges and protect federal investments in student financial aid, Congress requires the U.S. Department of Education to calculate financial responsibility composite scores that are designed to measure a college’s overall financial strength based on metrics of liquidity, ability to borrow additional funds if needed and net income. Private nonprofit and for-profit colleges are required to submit financial data each year, while public colleges are excluded under the assumption that state funding makes them unlikely to become insolvent.
Though not commonly known, these financial responsibility scores have important consequences for private colleges. Scores can range between -1.0 and 3.0, with colleges scoring at or above 1.5 being considered financially responsible and are allowed to access federal funds. Colleges scoring between 1.0 and 1.4 can access financial aid dollars but are subject to additional Department of Education oversight of their financial aid programs. Finally, colleges scoring 0.9 or below are not considered financially responsible and must submit a letter of credit of at least 10 percent of federal student aid from the previous year and be subject to additional oversight to get access to funds. The Department of Education can also determine that a college does not meet “initial eligibility requirements due to a failing composite score” and assign it a failing grade without releasing a score to the public. In this case, a college will be immediately subject to heightened cash monitoring rules that delay the federal government’s disbursement of financial aid dollars to colleges. However, private nonprofit colleges dispute the validity of the formula, claiming it is inaccurate and does not meet current accounting standards.
Many colleges with failing scores—particularly for several years in a row—will be forced to consider merging with another institution or closing their doors entirely in the near future. Other colleges closer to the passing threshold may be facing tight budgets for years to come, but their short-term viability is generally secure.
It is unlikely that a substantial number of students and families know that financial responsibility scores even exist, let alone use them in their college choice decisions. However, these scores do provide some potential insights into the financial stability of a college and could potentially be included in the new College Scorecard tool. Students who are considering attending a college that repeatedly receives a failing score should ask tough questions of college officials about whether they will be financially solvent several years from now. Policymakers should use these scores as a way to identify financially struggling institutions and provide support for ones with solid academic outcomes, while also asking tough questions about the viability of cash-strapped colleges that academically underperform similar colleges.
