For-Profit Colleges and Cal Grants

In California, a student at a for-profit institution can receive up to $9,708 annually via the state’s financial aid program — the same amount as if he or she were enrolled at a private nonprofit college or university. This amount is significantly greater than the $4,884 that a California State University student and the $1,551 a community college student can receive. Only at the University of California can a student earn greater annual awards, with a maximum of $11,124.

The Sacramento Bee estimates that California gives $94 million annually in Cal Grants to students at for-profit institutions — about $20 million more than it gives in aid to community college students. Concerned about the amount of money that commercial colleges receive from the state, some legislators last month proposed reducing the size of Cal Grants to students at for-profit institutions to the amount available to Cal State and community college students, depending on whether the students are working toward a two- or four-year degree.

“The public universities have taken on dramatic cuts,” Lawrence Hershman, member of the California Student Aid Commission, said in a statement at the time. “It’s time for the for-profit colleges to share in some of the pain.”

But for-profit institutions cried foul, complaining that they should not shoulder the burden if Cal Grant funding is cut by the state, as appears likely. They argued that Cal Grant awards should be cut across the board for all sectors. The state is looking to trim Cal Grant funding primarily as one way to help fill a $26.6 billion budget deficit.

Now, amid fierce lobbying from the for-profit sector, a state legislative committee is working on a compromise that would make students ineligible for Cal Grants at colleges whose student loan default rates exceed a certain, as-yet-undetermined threshold. While for-profit college officials say they are relieved that the original proposal appears to have been scuttled, they argued that the focus on loan default rates in the compromise language, which is still being finalized for inclusion in the state budget, unfairly targets their institutions.

Laura Brown, president of the California Coalition of Accredited Career Schools, said she has no problems with some of the other potential Cal Grant eligibility requirements lawmakers are considering — such as reporting completion and job placement rates — because they would apply to all institutions. And though any potential threshold for loan default rates would apply to all institutions, she takes issue with bringing that factor into the equation.

“It’s all about student choice,” Brown said. “Student loans shouldn’t even be in the mix when we’re talking about Cal Grants. If the legislature is trying to get at student loan default rates for for-profits, they should look at that in a larger forum. It’s ridiculous to link the two. To strip a student’s ability to get a Cal Grant just because they want to enroll at an institution that has a higher [loan default] threshold limits their choice.”

Diana Fuentes-Michel, director of the California Student Aid Commission, disagrees, adding that she thinks the compromise language is actually an improvement on the recommendations for finding Cal Grant savings that her commission made to the legislature last month. Among the other committee suggestions still being considered by legislators is reevaluating all Cal Grant recipients for eligibility each year, instead of just once at the start of their college career. For example, Cal Grant renewal recipients would have to meet "the same income and asset ceilings and minimum need as new recipients."

“The new rules are easier to understand for all institutions,” Fuentes-Michel said. “There’s a sense of balance as to how the formula applies…. This will send a cautionary note … that borrowing does have some risks.”

Though Fuentes-Michel admitted that for-profit institutions would probably be more affected by the compromise requirement — the commission suggests setting a cohort default rate cutoff of no more than 20 percent — she noted that some community colleges in the state would be affected as well.

A review of the two-year cohort student loan data for fiscal 2008, the most recent available from the U.S. Department of Education, shows that of the 32 California institutions with default rates higher than 20 percent, 28 are for-profit. The others include community colleges and a private nonprofit training school.

For about two decades, the federal government has used two-year default rates as one indicator of whether institutions are providing a meaningful education. Institutions with default rates above certain levels risk losing access for their students not only to federal subsidized loans, but also to Pell Grants. The cohort default rate (the government is in the process of shifting to a three-year rate) has its critics, though. Officials at for-profit colleges argue that they serve larger proportions of students from low-income backgrounds and that these individuals have a hard time repaying loans.

Still, the compromise language would not establish a strict cohort default rate cutoff, as the California Student Aid Commission suggested. Instead, it would establish a "student default risk index," looking at both number of borrowers at an institution and its cohort default rate. This would exempt colleges with relatively few borrowers from losing Cal Grant eligibility. (This article has been updated from an earlier version.)

Scott Lay, president of the Community College League of California, said he supports the Cal Grants compromise but is reserving ultimate judgment until its language has been finalized — something he says is unlikely to happen until after the state budget is approved in the next week or so.

“I share the committee’s concern with using Cal Grant dollars for programs that aren’t leading to employment or have high default rates,” Lay said. “I’m just wondering what kind of workload would be required on these new reporting requirements.”

Though Lay said he has never advocated “going after the for-profits to expand savings,” he admitted he did appreciate the initial idea of limiting Cal Grants for students attending for-profit institutions. Lay noted he would have preferred that Cal Grant awards to students at for-profit institutions be capped "at some level."

"That a student at a for-profit [in a two-year program] can earn six times more money than a community college student doesn’t make sense at all,” Lay said.

Ignacio Hernandez, legislative director of the Consumer Federation of California, would also would have preferred Cal Grant caps for students attending for-profit institutions. Still, he said he appreciates the attention being paid to default rates.

"It's a step forward," Hernandez said. "It's not all that we were hoping for, but it does send an important signal that Cal Grants should not be seen as a giveaway to these corporate schools. Still, we haven't given up on a straight cap, and we hope this isn't the end of the story for reform — especially in light of what's happening at the federal level," where Congress is looking at toughening requirements for access to federal aid programs for vocational programs in ways that would disproportionately affect for-profit colleges.