On September 30, 2015, RPI posted a $20.4 million letter of credit to satisfy a United States Department of Education requirement to continue to receive Title IV financial aid following the Department’s analysis of a June 30, 2014 audit of the Institute’s finances. The minimum letter of credit to receive aid was $4.1 million, 10 percent of RPI’s Title IV aid received that year; the higher amount, at least 50 percent of aid received, returned the school to financially responsible status with the Department, avoiding potential cash monitoring and other participatory requirements. This event subsequently received media attention in March 2016.
Title IV of the Higher Education Act of 1965 allows participating institutions to receive federal aid in the form of the Direct Loan, Perkins Loan, and Pell Grant, among others. These subsidies are granted to students on a need-based priority. In order to receive federal aid, participating institutions must submit audited financial statements to the Department. These statements are scored from -1.0 to 3.0 through the Department’s financial responsibility test. According to the Department, the score is calculated based on the primary reserve, equity, and net income ratios, which measure the school’s liquidity, viability, ability to borrow, and profitability. A college scoring between 1.5 and 3.0 is considered financially responsible; between 1.0 and 1.4 is financially responsible but requires additional oversight (i.e. cash monitoring); between -1.0 and 0.9 is not financially responsible.
The US Department of Education requires colleges to post letters of credit in such events of a low score financial responsibility test, late report submission, change of ownership, and mishandling federal aid. A letter of credit is a document granted by a bank to an applicant who wishes to substitute their own credit for that of the bank. The letter guarantees that the bank will pay the beneficiary a given amount of money upon meeting delivery conditions within a given time frame. In this case, the letter of credit is requested by an institution of higher education from a bank, benefiting the US Department of Education. In the event of bankruptcy of the college, the Department of Education will demand payment of the letter of credit to cover part of the cost of forgiving Title IV loans to affected students. Otherwise, the letter of credit will be allowed to expire. The Department of Education has expanded the circumstances resulting in a college being required to post letters of credit after the for-profit institution Corinthian Colleges folded, which cost the US Government hundreds of millions of dollars in loan forgiveness.
The audit of Rensselaer which resulted in the posting of a letter of credit covered activities for the year preceding June 30, 2014. The Department subsequently scored the audit with a failing composite score; the Department doesn’t publish failing composite scores, rendering RPI’s exact score unavailable. However, it is known through the Department of Education website (http://poly.news/s/8drcp) that Rensselaer’s score for the academic years including and following ’06–’07 were 3.0, 2.2, 1.9, 2.0, and 2.0 for ’10–’11. Scores for ’11–’12 and thereafter are unavailable, since RPI did not meet initial eligibility requirements due to a failing composite score. All information in this article regarding Rensselaer’s financial audit was obtained from the Inside Higher Education report.
On August 19, 2015, Rensselaer was requested to post a $4.1 million letter of credit by October 21, 2015, to continue to receive Title IV aid; instead, they posted a $20.4 million letter from Bank of America, issued on September 30, 2015, to become financially responsible again and avoid cash monitoring and other participatory requirements. The letter of credit expires on October 31, 2016.
On March 18, 2016, the online newspaper Inside Higher Education published “Getting Ready for Another Corinthian,” an analysis of data regarding colleges the US Department of Education required to post letter of credit, which can be found at http://poly.news/s/6hk07. Though the Inside Higher Ed article did not mention RPI by name, “The surprising list of colleges whose financial management has the government worried,” http://poly.news/s/p8qpd, published by The Washington Post that same day, included two sentences regarding Rensselaer’s letter of credit and financial state. Three days later, Allison Newman, Associate Vice President for Strategic Communications and External Relations, published the Institute’s response to The Post article, which can be found at http://poly.news/s/a1adl. Within the day, The Post republished that response in “Rensselaer Polytechnic: The Education Department is wrong about our university,” found at http://poly.news/s/twa4s.
The Polytechnic had the opportunity to sit down with Vice President of Finance and CFO Virginia Gregg and Vice President of Student Life Dr. Frank E. Ross III. Gregg began by saying that the Institute is “very financially sound,” and can afford to post the letter of credit requested by the Department of Education.
In their letter to the community, the Institute stated that “We disagree specifically with the Department regarding their treatment of pension liabilities and accumulated endowment gains.” Gregg was able to expand on this, saying that RPI currently has $250 million in pension liabilities, which the Department treats as a trades payable. In essence, the Department treats the pension debt as if it were payable within one year, which is not the case. Gregg described the pension as “very uncommon,” which could reason as to why Rensselaer was among a collection of lesser known and for-profit institutions on the Department’s list.
The meeting concluded with Gregg reiterating Rensselaer’s strong financial position. RPI was upgraded by Moody’s Investors Service from negative to stable last November. With the diversity of income and large endowment, the Institute is in a solid financial position, said Gregg.