NAICU Washington Update

Government Report Highlights Deficiencies in Financial Responsibility Standards

September 25, 2017

A new report from the Government Accountability Office (GAO) has shed light on numerous flaws and structural deficiencies in the calculation and usage of the federal financial responsibility standards. In 2012, NAICU convened a task force dedicated to studying the problem and recommending solutions.  The final report from the task force highlighted many of the same problems identified in the GAO report.
In particular, the GAO report offers three main limitations of the financial responsibility composite scores:
  • Accounting changes: It does not reflect updates in accounting practices.
  • Outdated financial metrics: It does not incorporate new financial metrics that would provide a broader indication of a school’s financial health, such as liquidity, historical trend analysis, or future projections.
  • Vulnerability to manipulation: It allows some schools to take advantage of a feature of the composite score calculation to inflate their scores by taking out loans, thereby avoiding requirements to post letters of credit.
Further, the GAO makes three recommendations of actions the Department of Education should take to improve the financial responsibility standards, including:
  • Updating the financial composite scores to better measure schools’ financial conditions.
  • Improving its guidance to schools on how it calculates the composite score.
  • Providing public data on final composite scores for all schools.

NAICU supports the bulk of the report. While the GAO could have drawn sharper distinctions between precipitous closure versus orderly closure, and provided more data comparing the non-profit and proprietary sectors, the report clearly articulates many of the problems associated with the financial responsibility standards.
The Department recently announced that it will convene a subcommittee of specialists dedicated to reexamining the financial responsibility standards, as currently constructed. The Subcommittee on Financial Responsibility will meet concurrent to a broader negotiated rulemaking panel on borrower defenses to repayment and gainful employment, scheduled to meet from November 2017 through January 2018.

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