Hundreds of colleges across the country that are doing a poor job of managing their finances are on a federal watch list that could ultimately make it difficult to access financial aid dollars, a critical lifeline for universities.
On Tuesday, the Education Department released the names of 556 colleges that it has placed under tougher oversight known as "heightened cash monitoring." There are myriad reasons schools can end up on the list, including turning in late financial statements, having accreditation issues or operating with a lot of debt.
Education Undersecretary Ted Mitchell said the problems ranged from "serious to less troublesome," and he called the added scrutiny more of a "caution light" than a "red flag to students and taxpayers."
Still, there is a lot more interest in the watch list these days because of the collapse of for-profit giant Corinthian Colleges. The company, which ran the Everest, Heald College and WyoTech schools, landed on the list last summer for missing financial reporting deadlines. The government delayed the schools' reimbursement of federal student loans for nearly a month, leaving the company strapped for cash and on the brink of closing.
Corinthian pleaded with the department for a lifeline to keep the doors open and received $16 million in federal student aid funds under the condition that it would sell or close its schools. Several months later, student debt collector ECMC Group purchased more than half of Corinthian's 107 campuses.
"We don’t think the typical school on this list has problems of the breadth and depth of Corinthian," said Education spokeswoman Denise Horn. "The majority of the schools [being monitored] continue operations without closing."
Still, the government did redact the names of the most endangered colleges that are under investigation.
"We're concerned that having those names out would impede those investigations and not allow us to get to the bottom of things at those institutions," Mitchell said on a call with reporters Monday. "However, we will report the status of those reviews . . . and be updating this list as the results of the reviews become clear."
Being placed on the watch list is not necessarily a sign that a school is in any immediate danger of losing federal funds or folding. The list is mostly made up of small private colleges or trade schools that have run into financial trouble as a result of low enrollment, said Trace Urdan, a senior analyst at Wells Fargo.
"These are the schools that don't have giant endowments and are operating based on tuition," Urdan said. "Either market pressures have caused them to have to engage in heavy discounting or their enrollment levels have dropped."
There are two degrees of monitoring, with Level 2 being the strictest form. The 69 schools listed as Level 2 must provide the government detailed documentation for every federal financial aid recipient before being reimbursed.
Schools listed as Level 1 must also use their own money to fund federal aid but don't have to provide such detailed information to be reimbursed. When colleges are in good standing, the government advances them the funds for federal student loans and grants.
While for-profit schools educate only about a 10th of college students in the country, they constituted more than half of the watch list. A lot of Corinthian's old schools made the list, as did other large for-profit chains such as ITT Tech and the Art Institutes.
ITT Educational Services spokeswoman Nicole Elam said the technical schools landed on the list for missing the deadline for filing financial statements, as a result of an accounting issue. She noted that the oversight has "in no way impacted" the company's ability to disperse aid to students.
The Consumer Financial Protection Bureau filed a lawsuit against ITT last year, accusing the company of pressuring students into taking on expensive loans that were destined to lead to default. ITT has called the allegations unfounded.
Urdan said the schools that are run by public companies previously disclosed the monitoring to investors, so the public disclosure is unlikely to hurt their stocks. But prospective students could shy away from schools on the watch list, placing added pressure on already poor enrollment, he said.
"It's not inconceivable to me that if this thing really blows up, you could then see a lot of schools get into worse situations as a result, lose students, fail to enroll students and ultimately go under," Urdan said.
The public release of the watch list follows months of wrangling between the Education Department and the trade publication Inside Higher Ed, which filed an open-records request last summer for the names of schools on the list.
Mitchell told reporters the department was reluctant to release the names because it could create competitive disadvantages, but the department changed its position in the interest of transparency.
Being on the watch list "is not an indictment of an institution," he said. "It's a suggestion that we at the department need to be paying closer attention to that institution's work."
The schools listed represent barely 10 percent of all colleges that receive federal financial aid. And according to Mitchell, the number of schools under scrutiny is about the same as in previous years. He said that there was an increase during the recession as schools struggled with their finances but that the uptick has since leveled off.