Since news broke a few weeks ago about the closure of Mount Ida College, there are a lot of upset students and parents. Everyone has a different story to tell, but there's one common theme: None of them saw this coming.
"We certainly were not prepared for the fact that the college itself was in such dire debt," said Laurel Collins, whose daughter is a veterinary tech major.
"I just don’t get how it got this bad," added student Lacey Perry.
So, is it possible to find out if a school is close to shutting down? Kind of like the health inspection grades that restaurants are required to post.
Tolani Britton, who teaches higher education economics at Harvard's Graduate School of Education, says the answer to my question is a yes -- and a no. It's a yes, Britton explains, because all for-profit and nonprofit private schools are issued what’s known as a Financial Responsibility Composite Score by the U.S. Department of Education every year.
"It essentially looks at the financial health of the institution," Britton said. "It’s a single number as opposed to a financial report that you have to decode or decipher."
They’re posted publicly. And the scores are based on three main factors:
- The primary reserve. That demonstrates whether an institution can cover its existing expenses.
- Equity. That basically measures a school’s capacity to pay unexpected expenses or even make campus improvements.
- Net income ratio. That looks at whether the school is operating within its means.
And all of this boils down to one score, from -1 to 3.
"If you are over 1.5 it means you are financially responsible. You're in the clear," said Britton. "If you’re 1.0 to 1.5 it means you’re financially responsible but there might be additional oversight from the government."
So, the Department of Education may start to monitor the school’s cash flow. And if you have a score that’s less than 1, that triggers even more government oversight.
But Britton added that while this sounds like a helpful measure on the surface, "this score doesn’t actually have good predictive power," she said.
Which is where the "no" answer to my original question comes in. According to Britton, only about one in five colleges that got a failing score in 2011 actually closed by 2017. It also missed flagging schools like Mount Ida College, which has consistently been scoring 1.8, a number that’s higher than the official danger zone.
So why is this score missing the mark in predicting college closures?
Melissa Emrey-Arras investigated this very question for the U.S. Government Accountability Office last year. She explained her team found several flaws in the system.
"Some of the particular issues that we found with it were things like it was no longer reflecting current accounting practices," Emrey-Arras explained.
She added it also doesn't factor in things like liquidity and it's vulnerable to manipulation, meaning some colleges were cheating the system.
"For example, some of them would inflate their scores by taking out large loans and then pay back those loans," Emrey-Arras said.
The now-defunct Corinthian Colleges was one of the biggest users of this tactic.
Emrey-Arras’ team also asked a group of credit rating agencies to issue their own ratings for comparison. She says in 2016 they assigned junk bond status to about 30 schools that the Department of Education gave passing scores to.
"We recommended that the Department of Education update this formula so that it’s not using something that’s over 20 years old," said Emrey-Arras.
I reached out to the Department of Education to explain its response the Government Accountability Office's findings. A spokesperson didn’t make anyone available.
So, what can students and families do to avoid getting stuck in a situation like what many are going through at Mount Ida College? Emrey-Arras actually recommends they still check out the financial responsibility scores.
"Even though this is not the most accurate tool, it is still a useful indicator and can be helpful to students and families," she said.
So while the scores may not be the most accurate, for right now it’s the best we’ve got -- unless you want to brush up on your corporate accounting skills.
This article was originally published on April 26, 2018.
This segment aired on April 26, 2018.
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