Financial Responsibility - Final Regulation Fact Sheet
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Financial Responsibility
Final Regulation Fact Sheet

Summary. We are committed to reinventing our regulations. As is required by statute, we must ensure that institutions participating in the student aid programs are financially responsible. This rule improves the process by which we determine institutional eligibility based on financial health. The rule reduces burden, allows the Department to better focus its oversight resources, and provides a more accurate picture of an institution's total financial condition. We developed this rule with extensive community input and involvement, and the process has drawn extensive praise.

Community Involvement. Numerous meetings were held with the community where considerable give and take occurred. We received over 850 written public comments, which indicates a significant level of community input.

Burden Reduction. One of the most important goals for this regulation is to reduce burden on postsecondary institutions without compromising financial accountability. Burden reduction has been attained in several areas:

  • Public institutions will only need to document their designation as a public entity instead of being subject to a ratio test.
  • Financial health is now measured with information found on financial statements, eliminating the costly back-and-forth between the Department and institutions;
  • The convoluted and difficult alternative methods to demonstrate financial responsibility have been removed and replaced by clear and simple alternatives.

Targeting Resources. The Department will be able to distinguish among institutions at various levels of financial responsibility, thus enabling it to focus its time and energy on those schools whose financial health is questionable. The Department can tailor its treatment of schools to the schools' demonstrated financial health, so that for participation in title IV, HEA programs, one size need not fit all.

Accounting for an Institution's Total Financial Condition. We evaluate the financial health of schools using a blended score that measures institutions' performances on key financial indicators. The blended score allows an institution's sources of financial strength to offset areas of financial weakness.

How the Rule Works. Private non-profit and proprietary institutions are measured on three financial ratios that are blended to produce a single composite score. The ratios and composite scores address and adjust for differences across business sectors.

  • Institutions earning a high composite score are considered financially responsible and may participate in the programs without additional monitoring.
  • Institutions with low composite scores are not financially responsible and may not participate in title IV, HEA programs unless they post a letter of credit.
  • Schools between high and low scores are considered to be "in the zone" of uncertain financial responsibility. They are financially responsible but are subject to additional monitoring and closer scrutiny to protect the interests of students and taxpayers. The zone alternative may only be used for three consecutive years.

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Last Modified: 09/23/2004