Road to a Perfect Composite Score

Ben Levy

​Nearly a decade of experience analyzing composite scores across various school types and sizes.

The U.S. Department of Education (USDOE) assigns a Composite Score to institutions participating in Title IV funding programs. This score serves as a key indicator of an institution's financial responsibility. But what exactly goes into calculating this score, and what are the benchmarks institutions need to strive for?

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​The Three Components of the Composite Score

The composite score is a weighted average of three key financial ratios:

• Primary Reserve Ratio: This ratio measures an institution's ability to cover its operating expenses in case of unexpected financial hardship. A higher ratio indicates a stronger financial cushion.
• Equity Ratio: This ratio assesses the proportion of an institution's assets that are funded by its own resources rather than debt. A higher ratio signifies a greater level of financial independence.
• Net Income Ratio: This ratio indicates how much profit an institution generates relative to its total revenue. A positive net income ratio demonstrates profitability.

Here's a breakdown of the specific benchmarks required for a perfect 3.0 composite score:

• For-profit Schools:
  • Net Income Ratio: 6% (Income before taxes divided by total revenue and gains)
  • Equity Ratio: 50% (Modified equity divided by modified assets)
  • Primary Reserve Ratio: 15% (Adjusted equity divided by total expenses and losses)

 

• Non-profit Schools:
  • Net Income Ratio: 4% (Change in net assets without donor restrictions divided by total revenue and gains without donor restrictions)
  • Equity Ratio: 50% (Modified net assets divided by modified assets)
  • Primary Reserve Ratio: 30% (Expendable net assets divided by total expenses and losses without donor restrictions)

It's important to note that these are just the benchmarks for achieving the highest possible score. A score lower than 3.0 doesn't necessarily mean an institution is in financial trouble. However, it does indicate areas for potential improvement.

How Can I Know Where My School Stands?
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• Review Prior Year External Audits: In addition to internal reports, review your school's most recent external audit. All audits of schools that receive Title IV funds are required to include the composite score and the associated calculation. You can try to compare your current financials to the prior year audited financials to come up with an estimate of your current composite score.
• Monitor Internal Financial Reports: Generate regular internal financial reports, either monthly or quarterly. These financial reports should consist of, at a minimum, a balance sheet and an income statement (statement of changes). Though these reports won’t show the modified and adjusted equity (net assets) or the modified assets, you should be able to get an estimate of your ratios by using the total equity (net assets) and total assets. This ongoing monitoring allows for early identification of areas needing improvement and allows for timely corrective actions.

• Track Your Progress Using Foresite: There has never been an industry tool available to allow schools to calculate their own composite scores. Our revolutionary software, Foresite, empowers schools to generate periodic composite scores. This unique tool goes beyond internal reports by providing a score that is identical to the Department of Education's internal calculations. By utilizing our software, you can track your progress towards a perfect score over time, identify areas for improvement, and ensure continued eligibility for Title IV funding.