Publication Date

10-2026

Faculty Advisor

Dean Bryan McCannon

Abstract

The U.S. Department of Education’s Financial Responsibility Composite Score aggregates three accounting ratios to assess the financial health of private higher education institutions, yet its predetermined weights lack a formal statistical foundation. This paper argues that a data-driven alternative better summarizes institutional financial condition. Using Principal Component Analysis on the Primary Reserve Ratio, Equity Ratio, and Net Income Ratio calculated from 2025 audited statements for 30 private nonprofit bachelor’s institutions in the greater Chicago regional market, we derive empirically-determined weights. The resulting PCA-based score correlates positively with the official FRCS but produces meaningfully different institutional rankings. Relative to our composite score, the FRCS overweights the Primary Reserve and Net Income Ratios while underweighting the Equity Ratio. We also show that the PCA weights are rather stable over time.

Disciplines

Economics

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Economics Commons

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