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Eight Colorado colleges have been placed on the U.S. Department of Education’s watch list of institutions requiring close financial scrutiny. The schools have failed the department’s "financial responsibility test," so their federal aid is restricted. 

The funding restrictions, known as "heightened cash monitoring," could be because of concerns about finances or how the college manages federal student aid. There are some bad actors. Federal officials on Tuesday told Corinthian Colleges Inc., which used to own Colorado's two Everest colleges, that it's being fined $30 million for misrepresenting job placement rates for its graduates.

But a closer look into some Colorado institutions found a more complex picture than fiscal irresponsibility as the list suggests. 

Here are the colleges affected:

  • Colorado Technical University (Colorado Springs)
  • The Art Institute of Colorado (Denver)
  • Heritage College (Denver)
  • Academy of Natural Therapy (Greeley)
  • National Personal Training Institute of Colorado (Lakewood)
  • Everest College (Colorado Springs)
  • Everest College (Thornton)

Colleges draw money from a federal account in order to pay out federal loans and grants to their students. The federal government audits how colleges handle those grants and loans to gauge whether the risk to taxpayers and students is an acceptable one.

A college being on the list "is not necessarily a red flag to students and taxpayers, but it can serve as a caution light," undersecretary of education Ted Mitchell wrote in a blog post. "It means we are watching these institutions more closely to ensure that institutions are using federal student aid in a way that is accountable to both students and taxpayers."

In Glenwood Springs, a third-party issue

One school, Glenwood Beauty Academy, in Glenwood Springs, was dinged with a "severe findings" comment on its audit, placing it into a category that means more stringent sanctions and monitoring. For example, federal authorities must manually approve every federal aid dollar that goes to the institution and money is delayed 30 days.

But owner Karen Fiolkoski said the main reason for the finding comes down to a mistake from a third-party financial aid servicer.

As with most small colleges, Glenwood Beauty Academy, which has been in business 32 years, is too small to have a ‘financial aid’ department like big colleges. They process their own financial aid using a federally approved national financial aid servicer.

When a student drops out, the servicer’s software program calculates the amount of a student loan that needs to be returned to the feds -- a percentage based on how long the student has been in school and how many credits he or she earned.

"The wrong formula had been put in by the servicer, and so I had to go back and calculate five years’ worth of ‘drops’ by hand," Fiolkoski said. The error happened in August 2011. Even so, the school’s name won’t come off the list until the school gets its final program review. But that’s slow to come. Due to turnover in the federal Department of Education, she says the case is on its fourth caseworker. 

"It goes on and on," Fiolkosky said. "In a way we’re lucky they [made the mistake] when they did or I’d still be doing it wrong. And being on ‘cash management’ is also a learning process because you have to process everything, and send it in, they check it and say, ‘OK you’re doing a good job, you know what you’re doing.’ So it’s not all bad."

Public shaming is problematic

The fact that the public sees the list without understanding why certain colleges are on it is one reason why Richard Ekman, president of the Council of Independent Colleges, says the lists amounts to a public shaming that's problematic.

It’s perfectly reasonable for the Department of Education to monitor the use of federal funds by colleges and universities and to move aggressively to correct any mismanagement or misuse of funds, Ekman said. But the lists frequently contain errors and the DOE is slow to correct those errors.

"Because they are slow. the damage is done," he said. "It’s out there in the media that a particular college is alleged to have not been handling its financial affairs well and that has an adverse impact on admissions on donations from alumni and other donors, and on the general reputation of the college."

Many complex factors

Other factors contributed to some schools' listing. The Great Recession, the 2013 floods, and Greeley’s continuing economic woes hit the Academy of Natural Therapy hard. 

"I had students who had to move away to other states that lost their homes," said owner Jennifer Mongan. "I have students on payment plans who couldn’t pay me, and then I had flooding in the school."

The 2013 floods meant she and her husband had to make repairs. That meant less cash on hand and more short-term debt, which affected the school’s financial responsibility score -- a composite score that judges how financially healthy an institution is looking at three ratios: a primary reserve ratio, an equity ratio and a net income ratio.

The academy’s score landed them on the "heightened cash monitoring" list, which costs them a little more money with their financial aid processor.

The recession that began in 2008, coupled with rule changes from the federal government, have made it difficult for small schools to respond quickly, she said. New financial rules to the federal Title IV (federal aid program) used to come every three years. "Now we’re getting six a month," Mongan said, and they sometimes come without much notice. 

For example, Pell grants are the nation's largest source of need-based college grants -- money that students do not have to pay back. In 2011, Congress imposed a six-year Pell limit. That change affected "at-risk" students such as low-income or single parents. They traditionally take longer to finish school because of outside responsibilities.

Then new 2013 federal loan limits hit. First-time borrowers could borrow direct subsidized loans up to 150 percent of the length of their program and not after that time.

"So all of the sudden our students that were able to get aid, aren’t able to get all the aid from the government that they used to get," Mongan said. "So guess who is carrying the brunt of it? It’s the school."

Schools try to prevent dropping out

Another complicating factor: Private, for-profit schools must have a high student completion rate in order to receive federal student aid. When a student drops out, although Mongan has been training the student for months, if they’re not at 60 percent of their payment period, the school has to return a big portion of the loan funds. So Mongan does what she can to get the students through until they’re on their feet and can pay her back.

That’s tricky she says, because massage therapy licensure laws dictate that students can’t practice until they get their certificate and they can’t get their certificate until they pay off their loans.

"We’ve been through a lot of adversity in past and we’re just staying strong," Mongan said, noting that the Academy of Natural Therapy has a 95 percent placement rate for graduates. It also has a waiting list to hire its graduates. And the school recently had a week-long program review with the U.S. Department of Education that was "almost perfect."

How other schools fared, reacted

On the Department of Education's "financial responsibility test," a score of 1.5 to 3 means an institution is financially responsible. Schools with scores equal to or greater than 1.0 but less than 1.5 are considered financially responsible but require additional oversight. Scores below 1.0 must post a letter of credit and face cash monitoring penalties.

For the first time in Denver-based Heritage College’s 29 year history, it didn’t reach the 1.5 threshold. In fiscal year 2013 the college scored 1.4.  The college says it has submitted audited financial statements for fiscal year 2014, and its composite score exceeds the 1.5 federal threshold. It anticipates the federal government will soon remove it from its oversight list. 

Denver’s Art Institute of Colorado is also on the heightened cash monitoring list. A statement from Education Management Corporation, the parent corporation owned in part by Goldman Sachs, said all its colleges and universities pass the Department of Education’s financial responsibility standards. But EDMC has not, it said, due to a 2006 deal. That’s when it sold its portfolio of more than 70 colleges to private investors to gain billions in capitol for expansion plans.

"As a result, since 2006, EDMC has been provisionally certified to participate in the Title IV program and has continuously posted a Letter of Credit with the U.S. Department of Education. The Department has placed our institutions on Heightened Cash Monitoring Level 1 due to this provisional certification," said EDMC’s Chris Hardman in a statement.

Having to file a letter of credit often indicates financial problems but Hardman said being on the list "has not negatively impacted our students’ ability to access or use their federal student aid funds or the company’s ability to access funds in a timely manner."

Colorado Technical University is part of the Career Education network of for-profit campus and online programs. A spokesperson said all Career Education schools were placed on the list due to job placement reporting concerns Career Education discovered at some of its health institutions in 2011. Since then, the statement read, Career Education has taken extensive steps to "prevent such a reporting issue from ever happening again." It said Colorado Technical University and its parent corporation passed the financial responsibility test.

Nationwide, 556 schools are on the list. Undersecretary of education Ted Mitchell said that’s just below 10 percent of all higher education institutions. That number has remained stable over time, and the uptick seen during the recession has subsided, he said.