California Using Student Loan Defaults to Limit College Grants

The state of California is taking a page from the US Department of Education's playbook. In an effort to trim a near $ 27 billion budget deficit, lawmakers are exploring the possibility of limiting payouts from the state's Cal Grant college student financial aid program based on a school's student loan default rate.

Cal Grants are state-funded grants that provide students with awards from $ 576 to $ 11,124 a year, depending on their degree program, to help pay for college. Under the measure currently being considered by the state legislature, schools which default rate on student loans falls above a certain threshold would be barred from offering Cal Grants to their students. Square in the crosshairs of the legislative move would be for-profit colleges and universities that operate in California, many of which default rates currently exceed the proposed threshold.

Among the affected schools would be five for-profit behemoths: the University of Phoenix; DeVry University; ITT Technical Institute; Kaplan Colleges; and Corinthian Colleges, which operates Everest College, Heald College, and WyoTech.

Combined, those five school networks received more than $ 42 million in grants in the 2009-10 academic year. All five institutions currently have a default rate that exceeds the state's Student Default Rate Index, a new calculation designed to identify institutions which students routinely default on their school loans.

For-profit schools already took a potential hit in February when the California Student Aid Commission voted unanimously to reduce Cal Grant awards to for-profit colleges, should the Cal Grant program be subordinated to budget cuts. The Commission cited for-profit schools' high default rates, poor oversight, and high dropout rates as justification for yanking state funding for Cal Grants at these schools. As part of its proposal, the Commission recommended capping maximum annual Cal Grant awards for students at for-profit institutions.

Currently, students enrolled in a voluntary program at a California community college are eligible for annual Cal Grant awards of $ 576. Students enrolled in a voluntary program at a career training school or other non-community college institution – such as a for-profit school – are eligible to receive up to an additional $ 2,592 a year.

Students enrolled in a two-year or four-year degree program at a private college – which includes for-profit schools – are eligible to receive up to $ 9,708 a year.

The Commission's recommendation would limit Cal Grants for students seeking voluntary certificates or two-year degrees at a for-profit college to the maximum award for first-year students enrolled in degree program of at least one year, currently $ 1,551.

Students pursuing a bachelor's degree at a for-profit institution would be limited to the maximum Cal Grant award available for students pursuing a two-year or four-year degree within the California State University system, currently $ 4,884.

In its recommendations last month, the Commission had also proposed cutting Cal Grant awards at institutions with high student loan default rates – a version of the measure currently being considered by the California legislature. Under the bill in its proposed form, a disqualified school could regain its eligibility to offer Cal Grants if its default rate were lowered to an acceptable level.

In the meantime, however, if the bill passes, the loss of state aid may force more California students at for-profit colleges to seek additional federal college loans and non-federal private student loans to make up the expenses that would have previously been covered by a Cal Grant.

Legislators say that the rule change makes sense because for profit colleges and universities use grants and other federal and state financial aid programs as an incentive to draw students in, particularly low-income students, without reducing what is often a high cost of attendance.

Although Cal Grants are student aid awards that, unlike college loans, do not have to be repaid, the cost to attend a private for-profit school often requires students to take on additional federal, state, and private student loans to complete their education .

In many cases, the coursework students complete at a for-profit college does not transfer to an accredited nonprofit university. Further, graduates often have a difficult time finding meaningful employment following graduation, which leads to a high default rate on their often-large school loan debts.

By barring students from using Cal Grants at these high-cost for-profit schools that are leaving students with large levels of debt and ill-prepared for the workplace, the California Student Aid Commission says it will limit these schools' ability to recruit low- income students, who are the most vulnerable to promises of grants and other student aid.

Representatives of the for-profit college industry are lobbying against the California proposal. If enacted, the legislation would save the state about $ 24 million, less than 1 percent of the $ 27 billion lawmakers need to cut to balance the state's books.