The Department of Education (Education) reviews the annual audits of postsecondary schools to assess compliance with financial responsibility standards for schools that participate in federal student aid programs and increases its oversight of schools that do not meet these standards. In school year 2014-15, Education reviews found that about 450 of approximately 6,000 schools that participate in federal student aid programs did not receive a passing financial composite score (a measure of schools’ financial health). Education may secure financial assurances from schools that do not meet the standards, in the form of a letter of credit, to help cover federal costs if a school closes and students become eligible to have their federal student loans forgiven. Education has also taken steps to expand its oversight of certain large schools and companies that own multiple schools through more frequent monitoring and additional reporting requirements.
School closures are relatively rare, but limitations of Education’s composite score hamper its effectiveness at identifying at-risk schools. About 95 schools closed in school year 2015-16, according to Education data. The vast majority of closures in the past 5 years were small schools (less than 500 students), but recent closures of several large schools affected thousands of students and resulted in over half a billion dollars in federal losses from unrepaid student loans. The composite score has been an imprecise risk measure, predicting only half of closures since school year 2010-11, although schools can close for nonfinancial reasons as well.
Despite these limitations, Education has not updated the composite score since it was first established 20 years ago. Identifying and responding to risks is a key component of federal internal control standards, and Education’s failure to update its key financial measure makes it harder for Education to identify and manage schools at risk of closure.Read the full report