Financial Responsibility Standards

The federal system for assessing the financial soundness of non-profit colleges is outdated. The Department of Education’s implementation of the current financial responsibility regulations has forced many institutions that are not at risk of precipitous closure to waste limited funds on securing expensive letters of credit. The Department has not fixed the problems, despite well-documented evidence that it is not following the generally accepted accounting principles required by law.  In addition, new regulatory provisions have been tied to financial responsibility. 

NAICU, in conjunction with other higher education organizations, has worked with the Department, and continues to work with Congress, to address this serious problem. The NAICU 2012 Report on Financial Responsibility provides detailed background on the issues and includes the following recommendations:

  • Ensure that the Department conforms to the HEA statute, its own regulations, and follows current standard accounting procedures.
  • Retain the alternative methods for demonstrating financial responsibility, as currently defined in the HEA statute and the regulations.
  • Require the Department to establish a uniform appeals process as part of the financial responsibility procedures, similar to that used in determining an institution’s cohort default rate.
  • Ensure that the Secretary of Education examines the “total financial circumstances” of institutions that fail the ratios test before assessing penalties.
  • Establish an advisory panel of nonprofit accounting experts to provide technical guidance to the Department. 

Financial responsibility composite scores are also being used as a threshold for participation in reciprocal agreements related to state authorization for distance education—further compounding the negative impact of the flawed formula.

In addition, on November 1, 2016, the Department of Education published a final borrower defense regulation that included a number of financial responsibility provisions. Of concern are a number of “triggers” that require a recalculation of an institution’s financial responsibility score. The rule is effective July 1, 2017. (Note: This rule could be rescinded under the Congressional Review Act in the 115th Congress.)

About

Being deemed financially responsible by the Department of Education is a condition of institutional eligibility to participate in Title IV student aid programs. For private nonprofit and for-profit schools, this involves reaching an acceptable composite financial responsibility score.

The accounting processes used by the Department of Education in the calculation of these composite financial responsibility scores for nonprofit colleges have serious shortcomings that can have detrimental and costly results for NAICU members.

The processes need to be improved to meet professional standards. NAICU has made several recommendations for change.

 

History

The current regulations, published in 1997, were developed by accounting experts with input from the higher education community. Financial responsibility and the formulas for determining it received greater notoriety in 2010 following an article in The Chronicle of Higher Education that listed over one hundred schools that received failing scores following the economic downturn in 2008.

Many NAICU members felt that the failing scores were unjustified, and misrepresented the financial impact of losses in their endowments related to the economic downturn. Yet, they were subjected to penalties, including heightened cash management and—in some cases—were required to purchase expensive letters of credit.

What You Can Do

  • Review the financial responsibility triggers in the Nov. 1, 2016 final borrower defense rule.  Especially note the deadlines for reporting triggers to the Dept. of Education.
  • Keep your institution’s board up-to-date on your federal financial responsibility score and the consequences of receiving a failing score.
  • If your institution receives a failing score and you are approached by the media, you may find these NAICU talking points helpful.

Resources


NAICU Press Releases 

NAICU Contact

Maureen Budetti: Maureen@NAICU.edu
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