Government watchdog blasts Education Department’s financial oversight of colleges

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In this 2014 photo, a woman walks past the Everest Institute in Silver Spring, Md. A new GAO report says Corinthian Colleges, which owned Everest, Heald College and WyoTech schools, never faced tough financial scrutiny from the Education Department. (AP Photo/Jose Luis Magana, File)

The closure of ITT Technical Institutes and Corinthian Colleges disrupted the education of tens of thousands of people and placed the Education Department at risk for absorbing millions of dollars in unpaid student loans. A report released Wednesday by the Government Accountability Office suggests the department could do more to guard against such events.

Education officials take annual stock of the fiscal health of about 6,000 schools participating in the federal student aid program by examining their cash reserves, debts and assets, among other things. Part of that assessment involves calculating what’s known as a financial responsibility composite score, a set of ratios derived from a school’s audited financial statements. Colleges with scores lower than 1.5 on a scale from negative 1 to 3 are subject to additional monitoring and reporting.

But the GAO said the composite score has serious limitations. The measure does not reflect updates in accounting practices or incorporate financial metrics, such as available cash, that would offer a broader indication of a school’s health. Colleges can also inflate their scores by taking out loans with due dates in excess of 12 months because the formula treats such debt as a favorable investment, according to the report.

Corinthian, for instance, took out short-term loans and reported them as long-term debt to artificially inflate its composite score, the GAO said. The for-profit college chain borrowed $43 million on the last day of its fiscal year in 2011 to boost its score and then immediately repaid the debt. It did the same thing the following two years in a scheme that helped the company avoid posting a letter of credit — a department requirement for ailing schools.

That letter of credit, which assures the availability of at least one-tenth of the federal aid the school receives, is meant to protect students and taxpayers if a college is unable to cover federal student-aid liabilities. Education officials interviewed by the GAO said they were not aware of the extent of Corinthian’s composite score manipulation until the company had closed its schools and declared bankruptcy in 2015.

Corinthian, which ran Everest Institute, WyoTech and Heald College, faced a barrage of federal and state lawsuits for steering students into high-cost loans and running dubious programs, yet received $1.4 billion in federal financial aid a year. The Education Department cut off the schools’ access to federal aid, forcing Corinthian to sell or close its campuses. After the chain collapsed, the government was forced by law to forgive the education loans amassed by its students.

“If Education had addressed this vulnerability [in the composite score] earlier, it could have required Corinthian to post a letter of credit that could have covered some of the over $550 million in loan discharges resulting from the school’s closure,” the GAO report said.

Matthew Sessa, deputy chief operating officer at the Education Department, argued in a response to the GAO report that “any financial measure the department would use for evaluating financial health could be manipulated once the elements of the financial measure are known.”

This is not the first time someone has sounded alarms about the vulnerability of the score. Earlier this year, the department’s inspector general raised concerns about how easily Corinthian gamed the system and recommended changes. Education officials said they would begin collecting more information to remedy the problem.

The GAO report was requested by Sens. Dick Durbin (D-Ill.) and Brian Schatz (D-Hawaii), and Rep. Rosa DeLauro (D-Conn.) following Corinthian’s demise.

“This report confirms our suspicions: The federal government must do more to protect students and taxpayers from schools that are in bad financial health,” Schatz said. “There is no excuse for inaction. The Department of Education and Secretary Betsy DeVos need to take this issue seriously.”

The Education Department has not updated the formula it uses for the composite score since it was implemented 20 years ago. It did, however, attempt to strengthen the letter of credit requirement as part of an overhaul of the borrower defense to repayment rule. That rule erases the federal debt of students defrauded by their colleges.

A component of that new rule expanded the conditions that would trigger a letter to include lawsuits filed by federal agencies, defaults on debt obligations and enforcement actions taken by an accreditation agency. That sparked consternation among some colleges and universities, who were appeased when DeVos decided this summer to delay and rewrite the rule.

“If Secretary DeVos continues her assault on protections for students and taxpayers by failing to strengthen or taking steps to weaken the department’s financial monitoring of for-profit institutions, she will be putting students and taxpayers at risk of another Corinthian-style catastrophe,” Durbin said.

The department plans to convene a committee this fall to update the composite score formula to reflect recent changes in accounting practices, which happens to be one of the recommendations of the GAO. The government watchdog also encouraged the department to do a better job of explaining to schools how the score is calculated because many are confused by the process. The GAO said the agency needs to keep the public abreast of scores for all schools, instead of releasing data on only a percentage of schools. That way, students and their families can make informed decisions about a college.

“The pressure continues to build for the department to take seriously its responsibility to ensure rigorous oversight of colleges, especially given the huge potential risks to students and taxpayers when those schools close,” said Clare McCann, deputy director for federal higher education policy at New America, a think tank. “A strong measure of schools’ financial well-being and viability is an absolutely essential piece of that.”

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