Predicting College Closure: Improving Upon the Federal Financial Responsibility Composite Score with Financial Ratio Analysis and non-Financial Indicators

The Department of Education is charged by the Higher Education Act of 1965 with carefully stewarding the federal government's massive investment in higher education. A critical tool toward that effort is the Financial Responsibility Composite Score (FRCS), a metric used to assess the financial health of all higher education institutions and to identify those at risk of closure, but which has been criticized in recent years for its flawed methodology and the resulting high costs of its errors.

The purpose of this research was to add to the body of knowledge on financial assessment in higher education by first evaluating the accuracy of the FRCS, and then determining whether an alternate model could better differentiate between colleges at risk of closure and colleges that are financially stable. A preliminary analysis suggests that the FRCS is largely ineffective in either predicting precipitous closure or identifying colleges that are financially stable. This study proposes an alternate model, the Modified Risk Assessment (MRA) Index, that builds upon evolving research by including in its methodology four financial ratios, eight key risk indicators, and a multi-year weighted average formula. Through extensive financial analysis of 25 private, non-profit colleges, the MRA index demonstrates a potential improvement in predicting college closures.