School

Article Dean Dorton

By: Crissy Fiscus

ITT Technical Institute is the latest school to close its doors after significant sanctions were placed upon the institution by the Department of Education (ED). ITT received a letter from the Department of Education on August 25, 2016 that outlined the sanctions including:

  • Increasing the line of credit to 40% Title IV funds received by the institution during its most recently completed fiscal year
  • Changing the method of payment to Heightened Cash Monitoring 2 (HCM2)
  • Notification and communication with the ED within 10 days of specifically identified financial and oversight events
  • Additional reporting requirements that required the school to provide information about operations, finances, and future plans
  • Additional operational requirements, which included that the school could not enroll new students that may receive federal student financial aid funds.

On September 5, 2016, just 11 days later, ITT announced that it would close its doors.

In reading the August 25, 2016 letter from the ED to ITT, I noticed that the very first sentence referenced prior communications from the ED from more than two years ago. In August 2014 ITT was cited by the ED for it late submission of annual compliance audited financial statements. As a result of this financial responsibility failure, ITT was permitted to continue participating in the Title IV program under a Provisional Program Participation Agreement for three award years. The letter went on to say that since August 2014 the ED had been actively monitoring ITT’s ongoing operations and finances.

Then in April 2016, the ED received notice from the Accrediting Council for Independent Colleges and Schools (ACICS) that ACICS had issued a directive to ITT asking the institution to prove why its accreditation should not be withdrawn. According to the ACICS Accreditation Criteria, this type of directive is issued when the Council determines that an institution is not in compliance, and is unlikely to become in compliance with the accreditation criteria. After much communication, including a hearing, another directive was issued by ACICS in August 2016, which continued to question ITT’s compliance with several accreditation standards:

  • Minimum eligibility requirements for compliance with all applicable laws and regulations
  • Requirements for student achievement, as measured by retention, placement, and licensure passage rate
  • Institutional integrity, a manifest in the efficiency and effectiveness of its overall administration of the institution
  • Financial stability, including having adequate revenues and assets to meet its responsibilities
  • Administrative capability, including overall management and record-keeping
  • ACICS admissions and recruitment standards
  • Federal and state student financial aid administration requirements

You will notice that I have bolded/highlighted several words throughout this article. Those words have very important meaning in the world of student financial aid, as they are the most common reasons the ED may place a school on a method of payment known as HCM1 or HCM2 (Heightened Cash Monitoring 1 or 2).

HCM1 requires the schools to make disbursements to students from its own funds, submit disbursement records to the Common Origination and Disbursement System, and then draw down the SFA funds. HCM1 is much less restrictive than HCM2.

HCM2 requires the school to disburse the money to the students and then submit a request for disbursement to the ED. The ED must approve the request before the funds will be disbursed to the school. Once on HCM2, very few schools survive – the cash flow squeeze is simply too much for them to overcome. I recently examined the list of schools which have been placed on HCM1 or HCM2 by the ED – 428 schools are on HCM1 and 65 schools are on HCM2. I also summarized the main reasons that schools were placed on HCM1 and HCM2:

Summary of top reasons schools are on HCM1:

  • Administrative capability – 17
  • Financial responsibility – 309
  • Audit late/missing – 84
  • Program review – severe findings – 1
  • Accreditation problems – 1
  • Other (CIO problems, eligibility) – 13

Summary of top reasons schools are on HCM2:

  • Administrative capability – 11
  • Financial responsibility – 6
  • Audit late/missing – 8
  • Program review – severe findings – 16
  • Accreditation problems – 12
  • Other (CIO problems, eligibility) –12

Go back and look at those bolded/highlighted words and compare them to the list of the top reasons that schools are placed on HCM1 or HCM2. As you can, see ITT had many of these issues for a period of years – beginning back in 2014, when the late audit captured the attention of the ED.

ITT is clearly not the first school that has closed due to being placed on HCM2 – honestly, very few schools survive that type of cash flow crunch. Compliance with the Department of Education’s requirements is not up to interpretation – it is absolutely required and the rules must be respected by those that wish to continue to award Title IV funds to their students. Understand the rules and create systems to make sure that they are followed. We make it our business to understand these rules and help schools to develop the policies and procedures to stay in compliance.

If your institution is interested in helping the ITT Tech students, the ED posted an electronic announcement with guidance, links, websites, and contact information surrounding the recent ITT closures.

If you would like to discuss further, contact your Dean Dorton advisor or Crissy Fiscus at cfiscus@deandorton.com.

Article Dean Dorton

Section 529 plans provide a tax-advantaged way to help pay for college expenses. Here are just a few of the benefits:

  • Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred.
  • Some states offer tax incentives for contributing in the form of deductions or credits
  • The plans usually offer high contribution limits, and there are no income limits for contributing.

Prepaid tuition plans

With this type of 529 plan, if your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school. This can provide substantial savings if you invest when the child is still very young.

One downside is that there’s uncertainty in how benefits will be applied if the beneficiary attends a different school. Another is that the plan doesn’t cover costs other than tuition, such as room and board.

Savings plan

This type of 529 plan can be used to pay a student’s expenses at most postsecondary educational institutions. Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.

The biggest downside may be that you don’t have direct control over investment decisions; you’re limited to the options the plan offers. Additionally, for funds already in the plan, you can make changes to your investment options only twice during the year or when you change beneficiaries.

But each time you make a new contribution to a 529 savings plan, you can select a different option for that contribution, regardless of how many times you contribute throughout the year. And every 12 months you can make a tax-free rollover to a different 529 plan for the same child.

As you can see, each 529 plan type has its pluses and minuses. Whether a prepaid tuition plan or a savings plan is better depends on your situation and goals. If you’d like help choosing, please contact us.

Article Dean Dorton

This is the second of our two-part series of emails providing an overview of the rise of student loan debt.

Alternative Financing Options

Student loan dept

Post the Great Recession, many students were able to seek help from their families in various ways. Some popular methods of financing tuition were home equity loans, refinancing home mortgages, and using savings.  However, home value regressions and increased unemployment vastly dampened those financing methods (Norris). This, in return, led to more students seeking out their own financing methods, in particular student loans, in order to attend college.  Likewise, in today’s society a college degree is becoming more of a need instead of an option regardless of the price.

Impact of Default Rates on Schools

As college has become more of a need for students, there have been more and more students taking on debt that are not able to keep up with the payments after school is finished.  With more debt comes more default, and the increasing default rates have consequences for higher education institutions.  “A school with a cohort default rate of less than 15% for each of the three most recent fiscal years for which data are available” does not need to delay the first disbursement of a loan for 30 days (for first-time borrowers who are first-year undergraduates).  If a school’s three most recent official cohort default rates are 30% or greater using the three year calculation, then the school will lose Pell Grant and Direct Loan funding for the remainder of the fiscal year (in which the school is notified) and the following two fiscal years (except in the event of a successful appeal).  When a school’s current official cohort default rate is 40% or more when using the three year calculation, the school will become ineligible for the Direct Loan program for the remainder of the fiscal year (in which the school is notified) and the following two fiscal years (except in the event of a successful appeal).  As such, schools have incentive to monitor their loan portfolios and work to help students stay on track with their payments. (Federal Student Aid)

Conclusion

College has become a necessity in today’s society. Through the increase in student loan debt and tuition cost, students will continue to attend college.  In summary, after the Recession, financing of college educations has somewhat evolved from the families’ responsibility to the students’.  This along with vague standards helped fuel the drastic sweep in student loan debt in such a short amount of time.  As there are negative consequences for high default rates for institutions, schools should work to maintain student success in paying off these loans.

Please contact Crissy Fiscus at cfiscus@deandorton.com or Bryan Bulkley at bbulkley@deandorton.com if you would like to discuss further.

View Crissy Fiscus’ Bio

 

Citations:

Norris, Floyd. “The Hefty Yoke of Student Loan Debt.” 20 February 2014.
https://www.nytimes.com/2014/02/20/business/economy/the-hefty-yoke-of-student-loan-debt.html?_r=0. 02 July 2014.

Federal Student Aid, An Office of the U.S. Department of Education. “2.4 Cohort Default Rate Effects.”
https://ifap.ed.gov/DefaultManagement/guide/attachments/CDRGuideCh2Pt4CDREffects.pdf. 02 July 2014.