Phi Beta Cons

Why Do the Feds Assess Finances, Anyway?

This month, the Department of Education published a list of 160 private colleges that failed its financial responsibility test. That is, they received less than 1.5 on a scale from -3 to +3. Ninety-four are non-profit colleges and universities. Most are not well-known, but they include Webber International, Corcoran College of Art and Design, and William Peace University.  

Schools that fail the assessment have to give the department a letter of credit assuring that they can pay up to 50 percent of annual student-aid funds from the  government should they run into financial trouble. If their financial conditions are quite severe, other penalties come into play.

The Dept. of Education explains that its scale “reflects the probability a school will be able to continue operations and meet its obligations to students and the Department.” Using the college’s financial statements, the department evaluates cash reserves and other liquid assets; capital resources the institution owns “free and clear”; and net income.

A number of analysts have disparaged this test in recent years (although politely). Kent Chabotar, former president of Guilford College, wrote in Trusteeship Magazine in 2011 that in addition to some specific concerns too technical for me to go into, a few of the questions include:

… whether the test conforms to the latest accounting standards, is interpreted consistently by Department of Education financial analysts, and defines terms in conformity with the latest generally accepted accounting principles.

Even more telling was an analysis by Robert Kelchen, an assistant professor of higher education at Seton Hall. He compared the Dept. of Education’s ratings with those of Moody’s (the latter was a smaller set because Moody’s rates only the schools that intend to borrow money). He found no significant correlation (specifically, just a 0.038 correlation) between the two evaluations.

All that is probably not surprising, but the federal exercise raises several questions.

First, regional accreditors like the Higher Learning Commission or the Middle States Commission on Accreditation conduct financial assessments of the schools they accredit. They are authorized by the Department of Education to determine if colleges should receive federal student-aid funds. If they deny or postpone accreditation, the reasons are most often financial rather than related to academic content.

Why should such financial calculations be done twice?

Second, if financial assessments are being done by both the Department of Education and the accreditors, then what is wrong with stopping the accreditors from being gatekeepers?

There has long been dissatisfaction with the accreditation process—generally because it accomplishes little while wasting a lot of resources.

One proposal has been to stop the accreditors from being the gatekeepers for federal student aid—to decouple accreditation and federal aid: Let accreditors do their accrediting but do not let them determine eligibility for federal funds. The Department of Education would decide whether schools are financially viable, using a set of relatively simple measures.

But fiscal conservatives have objected that this would make the federal government even more involved in education.

Now we know that the Department of Education already evaluates colleges’ financial responsibility. Let’s stop the duplication by stopping the accreditors from determining which schools are eligible for student aid funds.

If the Department of Education is responsible for determining whether schools are in sufficient shape to do their job, its officials will take their financial responsibility assessments much more seriously. And accreditors can sell their services on the basis of how good a job they do in assessing schools on a broad range of criteria. 

Jane S. ShawJane S. Shaw retired as president of the John W. Pope Center for Higher Education Policy in 2015. Before joining the Pope Center in 2006, Shaw spent 22 years in ...

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