An Analysis of New Cal Grant Eligibility Rules

An Analysis of New Cal Grant Eligibility Rules MAC TAylor • l e g i s l A Ti v e A nAl y s T • JA nUAry 7, 2013 An LAO RepOR t 2 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t ExECutivE SummARy New Cal Grant Eligibility Rules Set Maximum Default Rate, Minimum Graduation Rate. In response to concerns about the quality of some postsecondary institutions, California recently adopted new eligibility standards for colleges participating in the Cal Grant programs. Colleges with a substantial proportion of students taking out federal student loans must now meet two new eligibility criteria. Specifically, these colleges must maintain three-year cohort default rates below 15.5 percent and graduation rates above 30 percent. The legislation making these eligibility changes required our office to monitor initial implementation of those changes and analyze the state’s other options for measuring institutional quality. Changes Primarily Affect For-Profit Institutions. Under the new eligibility standards, 154 schools—comprising 35 percent of all institutions and more than 80 percent of for-profit schools participating in the Cal Grant programs in recent years—have been deemed Cal Grant-ineligible. The rule changes had limited impact on the private nonprofit sector and no impact on the public sector. As a result of disqualifying so many for-profit schools, the new rules have reduced Cal Grant recipients’ college choices and, at least in the short term, their access to postsecondary education. In the longer term, the eligibility changes could improve outcomes for Cal Grant recipients as students shift to eligible schools and institutions improve their outcomes. New Standards Have Drawbacks. Although they have generally worked as intended, we identified three notable drawbacks with the new Cal Grant eligibility standards. One drawback is that institutions can manipulate cohort default rates. Another drawback is that the current standards exempt some institutions without strong justification for doing so. A third drawback is that the measures penalize institutions that serve more disadvantaged students. Recommend Exploring Alternative Measures for Possible Use in the Future. We identify two alternative debt measures—a repayment rate and debt-to-earnings ratio—that theoretically could be used instead of the cohort default rate. The repayment rate counts the proportion of former students making at least partial payments on their loans whereas the earnings ratio, calculated with Social Security earnings data, provides a gauge of graduates’ ability to repay their loans. Both measures appear less susceptible to manipulation and could provide more meaningful indicators of institutional quality moving forward. The data necessary to use these measures, however, are not yet readily available. As a result, we recommend the Legislature maintain the current default measure for now. Recommend Applying Graduation Rate to All Schools and Accounting for Differences in Schools’ Student Populations. We also recommend the Legislature apply the graduation rate standard to all schools without exemption. We recommend modifying the measure, however, to focus only on the graduation rate of Cal Grant recipients. Cal Grant programs are reserved for students working toward degrees and certificates. Measuring graduation rates for these students—while avoiding the measurement challenges of accounting for students pursuing different goals—would provide a reasonable assessment of whether institutions are providing value for the state’s Cal Grant investment. In addition, we recommend the Legislature explore ways to take into www.lao.ca.gov Legislative Analyst’s Office 3 An LAO RepOR t consideration a school’s student characteristics to avoid creating a disincentive for schools to serve disadvantaged students. Recommend Changes to Process. In the final section of the report, we raise some concerns about implementation of the new standards and make recommendations to address those concerns. Although the California Student Aid Commission (CSAC) is required to certify institutional eligibility by October 1 each year, the U.S. Department of Education plans to release new graduation rate data later in October. For this reason, we recommend changing the certification deadline to November 1 if the Legislature maintains the current graduation rate measure. We also note that the recent policy changes—implemented in the middle of Cal Grant award cycles—have left many students with insufficient time to make alternative plans for the coming academic year. Moving forward, we recommend the Legislature avoid making changes to eligibility rules during award cycles already underway, instead making them effective for the next award cycle. Some eligibility changes, such as those requiring consultation on specific metrics to be used, may require even longer implementation lags. 4 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t iNtRoduCtioN As part of the 2011-12 budget package, report in January 2013 on implementation of California adopted new eligibility standards for the new policies. The Legislature also requested colleges participating in the Cal Grant programs. that we make recommendations for how best to Based on the changes, colleges with a substantial measure the quality or effectiveness of educational proportion of students taking out federal student institutions participating in the Cal Grant loans and a high percentage of those borrowers programs. defaulting no longer qualify to participate. The Below, we first provide some background 2012-13 budget package tightened the loan default information on the concerns about institutional limit and added a minimum graduation rate that quality that led to the recent eligibility changes. colleges must meet to remain eligible. The effects We then describe the implementation of the of these new rules were difficult to predict because new standards and their effects on students, they would depend in part on how students and institutions, and the state budget. Lastly, we offer colleges responded to the changes. Consequently, recommendations for eligibility standards and the Legislature directed our office to submit a implementation changes that would better protect student and state interests. BACkGRouNd Cal Grant Is State’s Primary Student Aid • A California public postsecondary Program. The state’s main Cal Grant program educational institution. guarantees financial aid awards to recent high school • A California nonprofit institution graduates and community college transfer students headquartered and operating in California who meet financial, academic, and other eligibility and accredited by the Western Association criteria. The state also provides a relatively small of Schools and Colleges that demonstrates number of competitive grants to students who do administrative capability (including not qualify for entitlement awards. Cal Grants cover policies, procedures, systems, and full systemwide tuition at the public universities for personnel) and certifies that 10 percent up to four years and partly contribute to tuition costs of its operating budget is expended for at nonpublic institutions. Apart from tuition grants, institutionally funded student financial aid some students qualify for grants that cover a portion grants. of their living costs. Altogether, the state awards more than 340,000 Cal Grants annually. • A California institution that participates Existing Minimum Institutional Standards in the federal Pell Grant program Retained. Even prior to the 2011 changes, schools and at least two of three specified had to meet minimum standards to participate in federal campus-based aid programs Cal Grant programs. These standards remain in (federal work-study, Perkins Loan, and place alongside the new restrictions. To qualify, an Supplemental Educational Opportunity institution must be one of the following: www.lao.ca.gov Legislative Analyst’s Office 5 An LAO RepOR t Grant programs). To participate in these Legislature Enacts tougher programs, an institution must meet federal institutional Eligibility Standards standards that include state approval to The Legislature enacted Chapter 7, Statutes operate (or state exemption from approval of 2011 (SB 70, Committee on Budget and Fiscal requirements), accreditation by a federally Review), and Chapter 38, Statutes of 2012 recognized accrediting agency, minimum (SB 1016, Committee on Budget and Fiscal Review), admission standards (such as requiring high limiting institutional participation in Cal Grant school graduation or its equivalent), and programs. In both years, the legislation was part various standards of financial responsibility of the budget package. These changes marked the and administrative capability. In addition, first reductions in institutional eligibility since the schools must maintain student loan default inception of Cal Grants in 1976. rates below specified levels. (See nearby box The 2011-12 Budget Package. Chapter 7 for explanation of default rates.) established a student loan default rate limit for colleges seeking to participate in the Cal Grant Policymakers Concerned About programs. Institutions had to maintain three-year institutional Effectiveness cohort default rates below 24.6 percent to remain In recent years, a number of highly critical eligible in 2011-12, with a rate below 30 percent national news stories and a major congressional thereafter. This new eligibility standard applied investigation of for-profit education companies have only to institutions with 40 percent or more of their raised concerns about student outcomes at for-profit undergraduates borrowing federal student loans colleges. These investigations highlighted misleading (effectively exempting all community colleges). For recruitment practices, poor completion rates, and high transitional purposes, Chapter 7 also specified that student debt among for-profit education students. continuing students at newly ineligible institutions Some of the institutions implicated in these reports still could qualify for renewal awards, though participate in the Cal Grant programs, prompting the award amounts were reduced by 20 percent. concern that state funds may be encouraging some In addition, Chapter 7 required all colleges California students to attend poorly performing participating in the Cal Grant programs to provide schools. Although Congress strengthened standards data on certain student outcomes, including in 2008, state lawmakers questioned whether the new graduation rates, employment rates, and graduate requirements went far enough. earnings. Budget Concerns Also a Factor. At the same The 2012-13 Budget Package. Chapter 38 time these investigations were uncovering evidence reduced the allowable default rate and added a of questionable practices at for-profit colleges, the minimum graduation rate. Beginning in 2012-13, state was facing a substantial structural budget deficit. institutions must maintain cohort default rates Moreover, Cal Grant costs doubled between 2006-07 below 15.5 percent and graduation rates above and 2011-12—growing faster than all other major 30 percent to remain eligible. While the legislation areas of state government. For all these reasons, the continued the exemption for institutions with less Governor and Legislature sought ways to stem growth than 40 percent of undergraduates borrowing, it in Cal Grant costs while addressing their concerns ended the exception for renewal awards beginning about the quality of some participating colleges. in 2013-14. As a result, recipients at ineligible institutions will have to transfer to eligible ones to 6 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t Student Loan default Rates and Federal Student Aid Measuring Cohort Default Rates. Federal student loan cohort default rates are measured from the time a borrower’s loan enters the repayment period (usually six months after graduation or leaving school) for a period of two or three federal fiscal years. A borrower whose loan entered repayment any time during the 2008-09 federal fiscal year is counted in the official two-year cohort default rate for 2009 if the borrower defaults on the loan before the end of the 2009-10 fiscal year. Although the definition of default varies by type of loan, it generally means that the loan has been delinquent (that is, at least one missed payment remains outstanding) for at least 360 days in the two-year period. Defaults Peaked in 1980s . . . In the late 1980s, the U.S. Department of Education grew concerned about increasing student loan default costs. The growing default volume was largely attributed to rapid expansion of private trade schools that were recruiting many unprepared students, often without providing a useful education leading to gainful employment. One federal study found about 1,200 schools with default rates greater than 40 percent. While student loan volume nearly tripled in the 1980s, federal Graphic Sign Off default payments increased 16-fold. . . . Prompting New Policies. Congress imposed sanctions on schools with high default rates Secretary beginning in 1991. Schools with two-year cohort default rates exceeding 40 percent in any one year were Analyst excluded from participation in federal student loan programs. Those with rates exceeding 25 percent for Director three consecutive years lost eligibility for Pell Grants as well as loan programs. The new policy eliminated Deputy more than 1,200 high-default schools over the next several years and reduced aggregate default rates from a high of more than 22 percent for the 1990 cohort to a low of 4.5 percent by 2003. The figure below shows the history of two-year cohort default rates over this period. New Default Measure Effective in 2012. Default rates began to rise again in the mid-2000s with the expansion of for-profit education. In addition, federal regulators were concerned about strategies employed by institutions and lenders to delay defaults just beyond the two-year period used to calculate official rates. As part of the Higher Education Opportunity Act of 2008, Congress lengthened the operative default period from two to three years, beginning with the cohort of borrowers entering repayment in 2008-09. The change increased Student Loan Defaults Declined Following the aggregate default rate for public and Federal Sanctions in 1991, but are Rising Again nonprofit institutions by slightly more than Official National Two-Year Cohort Default Rates 50 percent and nearly doubled the rate for 25% for-profit schools. To partly compensate for the longer default period, the department 20 changed the threshold for sanctions from a 15 default rate of 25 percent to 30 percent for three consecutive years (or 40 percent in any 10 one year). Sanctions based on the three-year 5 rates are to be imposed beginning in 2014. Based on current rates, more than 250 schools 1987 19891991199319951997199920012003200520072009 would face potential sanctions. Cohort Year www.lao.ca.gov Legislative Analyst’s Office 7 ARTWORK #110723 An LAO RepOR t continue using their Cal Grant awards. The budget 2014-15 for students at nonprofit institutions, and package also reduced maximum Cal Grant award 59 percent by 2013-14 for students at for-profit amounts for students at nonpublic institutions. institutions. The Appendix contains sections of Maximum awards will decline 17 percent by the revised Cal Grant statute incorporating the combined changes in Chapters 7 and 38. imPLEmENtAtioN to dAtE First-year implementation frequently asked questions to post on its website and distribute to the financial aid and counseling Ineligible Institutions Quickly Identified. community. In addition, the commission updated The Governor signed Chapter 7 on March 24, its automated Grant Delivery System to display 2011 establishing the cohort default rate limit cohort default rates, identify ineligible institutions, at 24.6 percent. Within about two weeks, CSAC prevent new awards at these schools, and reduce certified the three-year cohort default rates of renewal awards at these schools by 20 percent. all participating schools and notified the top Commission staff conducted two webinar training administrative official at each ineligible school by sessions with campus financial aid administrators letter. Because the U.S. Department of Education regarding the eligibility and system changes. had not yet published official three-year cohort Certification for 2012-13 Initially Expanded default rates, CSAC used unofficial 2008 trial Eligibility. The commission certified institutions’ three-year rates. three-year cohort default rates for the 2012-13 Students Admitted to/Attending Ineligible academic year by October 1, 2011, as required Institutions Quickly Identified, Some by the new law. Because the U.S. Department of Backtracking Required. By the time the new Education had not yet published official three-year restrictions became law, CSAC already had begun cohort default rates, the 2008 trial rates CSAC awarding grants for the 2011-12 academic year. had used for the previous certification were still Some of these grants were to new students at newly in effect. Although the rates did not change, the ineligible institutions. In early May, CSAC staff threshold for institutional eligibility moved from sent letters and e-mail messages to these students, 24.6 percent to 30 percent, reducing the number advising them that they would need to transfer to of institutions deemed ineligible for Cal Grant eligible schools to receive their Cal Grant awards. participation by nearly half. The commission The commission also notified continuing students published a new list of ineligible institutions based at ineligible schools that their awards would be on these factors. reduced by 20 percent. Commission Notified Financial Aid Second-year implementation under New Rules and Counseling Communities, Updated Revised Standard for 2012-13 Substantially Grant Delivery System. In the first months of Reduced Number of Eligible Institutions. implementation, CSAC notified college financial Following the 2012 changes to the law which aid administrators and high school counselors of reduced the default threshold from 30 percent to the changes in the law. It also compiled a list of 15.5 percent, CSAC revised its list of ineligible 8 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t schools. Once again, some institutions that were System (IPEDS) website (which is designed for initially deemed eligible (based on the 2011 research and policy purposes and was the source legislation) were disqualified after grants already for the current year’s certifications) until October were awarded to students at those institutions. 9, more than a week after CSAC’s deadline for Commission staff repeated the implementation certifying the rates. The primary difference steps from the prior year, notifying school officials, between the rates released through IPEDS and students, college financial aid administrators, and those published earlier on College Navigator is high school counselors of the eligibility changes that IPEDS includes estimates for schools that and their implications, completing this process in did not report their actual rates for a given year. August 2012. Because CSAC used the most recent data available Certification for 2013-14 Raises Some on IPEDS, it applied the 2010 rates to determine Concerns. Chapter 38 requires CSAC to certify eligibility for both the 2012-13 and 2013-14 award institutional eligibility by October 1 each year. This cycles. As a result, ten institutions remained date was selected to follow the U.S. Department ineligible despite having improved their graduation of Education’s publication of cohort default rates. Conversely, seven schools that would have rates, which by federal law must be completed by lost eligibility using the new rates remained eligible. September 30 each year. When the Legislature According to IPEDS officials, the department added the minimum graduation rate, it left the expects to release graduation rates on both the same certification date in place. There is no College Navigator and IPEDS websites in early statutory requirement, however, for the October going forward. U.S. Department of Education to publish Several Institutions Have Appealed CSAC’s graduation rates by the same date. The department Eligibility Determination. Six schools have filed released the latest (2011) graduation rates through appeals challenging their loss of eligibility. The its College Navigator website on July 5, 2012. This is commission has denied each of these appeals, a website designed to deliver consumer information noting that it is required by law to certify the about postsecondary institutions. The department latest rates published by the U.S. Department did not release the 2011 graduation rates through of Education. Two of the challenges are being the Integrated Postsecondary Education Data litigated. idENtiFyiNG thE EFFECtS oF RECENt ChANGES In this section, we describe the immediate information shows that about 3,200 students who effects of the new eligibility standards on students, were offered new Cal Grant awards for 2011-12 were schools, and the budget. As noted at the end of the initially planning to attend schools that later were section, determining the longer-term effectiveness deemed ineligible, almost all of them for-profit of this policy will take more time. schools. About 550 (18 percent) of these students instead attended eligible schools, primarily shifting Students to other for-profits or the California Community More Than 2,500 New Cal Grant Recipients Colleges (CCC). Another 450 students (14 percent) Did Not Use Their Awards in 2011-12. Preliminary requested leaves of absence from the Cal Grant www.lao.ca.gov Legislative Analyst’s Office 9 An LAO RepOR t program, preserving their awards for later use recipients. Consequently, these recipients now rather than claiming them. The remaining 2,200 have fewer options for using their Cal Grant students (68 percent) did not claim their Cal awards. Students’ choices are most constrained Grants, and we have no information concerning in the for-profit sector, where a large majority their college attendance. They may have opted to of schools were disqualified. This reduction in attend an ineligible California institution without for-profit eligibility coincides with enrollment Cal Grant support, decided not to go to college, restrictions in the public sector. At California State or transferred to an out-of-state school. Normally, University (CSU), 16 of 23 campuses are impacted not all students who are offered initial awards and do not admit all fully qualified applicants. actually claim them. The proportion of recipients Even at the remaining seven CSU campuses, some claiming awards—which differs by institutional majors are oversubscribed. Both CSU and CCC sector and type of award—is called the take rate. have been unable to meet all student demand for Accounting for the take rate, it appears that at least courses, slowing progress toward completion for 1,000 students who would normally have used their some students. The combination of these factors awards in 2011-12 did not do so. (If the Legislature exacerbates the impact of the new measures on would like a more complete picture of the new student choices. policy’s initial impact on these students, it could Nontraditional and Disadvantaged Students direct CSAC to work with the National Student Particularly Affected. Compared to the public and Clearinghouse service to track their attendance nonprofit sectors, the for-profit segment as a whole patterns.) serves students who tend to be older and are more Less Effect on Students Renewing Awards. likely to be financially independent from parents, Preliminary information also indicates that of financially responsible for dependents, and from a about 1,700 students attending ineligible schools racial or ethnic minority group. For-profit students who were offered renewal awards for 2011-12, about are also more likely to have below-average income 60 percent remained at their schools and received and parents with no postsecondary education. a reduced award, 9 percent transferred to eligible Several of these factors make students more likely colleges, and another 4 percent took leaves of to drop out of school and default on student loans. absence. No further information is available about Because the new standards primarily exclude more than one-quarter of the renewal recipients at for-profit institutions from Cal Grant participation, ineligible schools. these students are disproportionately affected. Commission Has Not Provided Data for Postsecondary institutions 2012-13. Initial projections suggested that about 7,600 new recipients and 5,600 renewal Most For-Profit Schools Disqualified. Applying recipients would be affected by the new policy, the eligibility standards in Chapter 7, CSAC identified after accounting for the take rate. Despite repeated 76 schools as ineligible for 2011-12, 42 of which requests, CSAC has not provided information would remain ineligible for 2012-13. Following to the Legislature regarding the actual numbers enactment of Chapter 38’s stricter standards, CSAC affected to date. revised the list of ineligible institutions for 2012-13 Changes Reduce Student Choices. The new to include 154 schools, comprising 35 percent of all policies disqualified many schools (see next institutions—and more than 80 percent of for-profit section) that historically have served Cal Grant schools—participating in the Cal Grant programs 10 Legislative Analyst’s Office www.lao.ca.gov in recent years. The rule changes had limited impact but three of the institutions in the highlighted range on the private nonprofit sector and no impact on the are for-profit schools, depicted by red dots. (The three public sector, as shown Figure 1. are nonprofit schools, shown as dark blue dots.) Most Each dot in the figure depicts a Cal Grant nonprofit schools have moderate to high borrowing participating school with enrollment of at least 500 rates but low default rates. All public universities, students. Its location on the graph represents both depicted in light blue, have moderate proportions the proportion of students borrowing federal student of students borrowing and low default rates, while loans and the cohort default rate for the school. the community colleges, shown at the bottom of the Schools with high borrowing and default rates are in figure, have low borrowing rates and a range of default the top right region of the figure. The highlighted area rates. represents the range in which schools are ineligible State Budget to participate in Cal Grants—those with more than 40 percent of students having federal loans and having Savings on Target for 2011-12. General Fund default rates of 15.5 percent and above. (The figure savings from the default rate standard in 2011-12 does not address the graduation rate standard, which were initially projected at $24 million, and adjusted is a separate, additional eligibility requirement.) All down to $10.7 million before the budget was finalized. 100% 90 80 70 60 50 40 30 20 10 0 0 5 10 15 20 25 30 35 40 45 50% Percentage of Students Who Default on Their Federal Loans Within Three Years of Repayment (2008) ARTWORK #110723 )8002( snaoL laredeF tuO kooT ohW stnedutS fo egatnecreP An LAO RepOR t Graphic Sign Off Secretary Analyst Director Deputy Figure 1 New Standards Primarily Affect For-Profit Colleges Lose Grants For-Profit Colleges Keep Grants Nonprofit Colleges Community Colleges Public Universities Adapted from Chronicle of Higher Education, March 22, 2011. Only Colleges that enroll more than 500 students are shown. www.lao.ca.gov Legislative Analyst’s Office 11 An LAO RepOR t The erosion was due in part to the U.S. Department Longer-term Effects of Education’s default rate corrections, resulting in While the immediate impact on student awards, lower rates and fewer ineligible schools than originally institutions, and budget savings will be apparent identified. Based on information provided in February once more data become available, the longer-term 2012, savings were on track to meet the new target. effects will be more difficult to discern. This is The commision has not provided requested data on because they depend to a large extent on how the final savings amount. students and institutions adapt to the new rules. Savings Falling Short for 2012-13. Savings Overall, we believe the impacts will diminish as for 2012-13 were projected at $55 million. Early new students seek enrollment at eligible institutions, indications are that savings will fall at least $5 million eligible institutions expand to meet demand, and short of that target. However, CSAC has not provided ineligible institutions take steps to improve their requested data to the Legislature to update estimated student outcomes and regain eligibility. savings. ASSESSmENt ANd RECommENdAtioNS In this section, we recommend the Legislature drawbacks, as well as ways to address them, are maintain the current eligibility standards in the discussed in more detail below. near term. Moving forward, we recommend the institutions Can manipulate Legislature continue to monitor the effects of Cohort default Rates the recent changes and begin exploring various alternative measures of institutional quality. We A recent federal investigation and related also recommend the Legislature make a few specific analyses have found that many for-profit schools changes to the process. employ extensive “default management” strategies to keep their cohort default rates below federal M D R M , aintain efault isk easuRes thresholds. Some of these strategies, including B C R f ut onsiDeR efineMents in utuRe forbearance and deferment, permit students to No broad agreement exists on direct, delay payments without being deemed in default. quantifiable measures of institutional quality. In these cases, most students end up increasing Absent such measures, student outcomes including their total debt and likely would be better served default rates and graduation rates provide rough by repayment counseling or alternative repayment proxies for how well an institution is serving plans. Another default management strategy students. The current Cal Grant eligibility involves combining campuses of multi-site standards, however, have three notable drawbacks. institutions in ways that minimize the aggregate One drawback is that institutions can manipulate default rate. A third strategy increasingly used by cohort default rates. Another drawback is that schools is directing students to private student the current standards exempt some institutions loans, which usually have less beneficial terms and without strong justification for doing so. A third conditions than federal loans but are not included drawback is that the measures penalize institutions in schools’ federal default rate calculations. that serve more disadvantaged students. These 12 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t Recommend Legislature Explore Two the cohort default rate as a proxy for institutional Alternative Debt Measures . . . Because of quality. In the absence of federal data, California increasing concern about institutions manipulating would have considerable difficulty directly their cohort default rates, the U.S. Department of collecting the information—including annual Education has developed alternative debt measures, loan obligations and earnings data—necessary to including a repayment rate and debt-to-earnings calculate these more nuanced rates, especially at ratio. In both cases, the measures appear to be the program level. less susceptible to manipulation. The repayment Weak Justification for rate counts the proportion of former students Exempting Some Schools making at least partial payments on their loans. By comparison, the earnings ratio, calculated with Another drawback of the existing system Social Security earnings data, provides a gauge is that it exempts some schools from the new of graduates’ ability to repay their loans. The standards without strong justification. Specifically, earnings ratio is calculated for each instructional the graduation rate requirement applies only to program (rather than the entire institution). It schools with more than 40 percent of students compares the average annual loan repayment owed borrowing federal loans. In effect, this policy by students who completed a program with those excludes community colleges from the graduation students’ average annual earnings. (The measure rate requirement because low student fees, a high includes private loan debt, when that information proportion of part-time and working students, is known.) For now, a federal court has blocked and an extensive fee waiver program result in few implementation of the regulations that require community college students borrowing. The policy institutions to report data for these two measures. justification, however, for linking the borrowing If the federal reporting requirements are reinstated, and graduation rate standards is unclear. If a we recommend California consider using these minimum graduation rate requirement is intended alternative measures instead of the cohort default to measure institutional quality, then applying rate for determining Cal Grant program eligibility. it only to some institutions is at best awkward. Moving forward, even these better alternative Regardless of the share of students borrowing, a measures likely could be further refined. For graduation rate could provide the Legislature with example, if more detailed repayment data become additional information about effectiveness. available in the future, California might be able Apply Graduation Standard to All Schools— to use a repayment measure that identifies the But Focus Only on Graduation of Cal Grant proportion of students who are substantially Recipients. We recommend the Legislature apply current on their loan repayment—a notably better the graduation rate requirement to all Cal Grant indicator than the proportion of students making institutions but refine the measure to focus only $1 or more of repayments. Such refinements in on the graduation rate of Cal Grant recipients. Cal the measures would provide even more useful Grant programs are reserved for students working information to both policymakers and students toward degrees and certificates. For example, a comparing colleges. student must be enrolled in a two-year or four-year . . . But Maintain Cohort Default Rate program leading to a degree to receive a Cal Measure for Now. Until these data are readily Grant A and in a degree or certificate program available, however, we recommend continued use of of at least one year for a Cal Grant B. Measuring www.lao.ca.gov Legislative Analyst’s Office 13 An LAO RepOR t graduation rates for these students—while avoiding underlying student characteristics to provide an the measurement challenges of accounting for exception for schools that do not meet the limit but the many community college students pursuing significantly outperform peer institutions. different goals—would provide a reasonable e o p Q xploRe theR Roxies foR uality assessment of whether institutions are providing value for the state’s Cal Grant investment. New Cal Grant Reporting Requirements Need More Work, but Could Be Considered in Future. measures do Not Account for Chapter 7 created new reporting requirements for differences in Students Served Cal Grant-participating institutions, including A third drawback of some existing measures disclosure of enrollment, persistence, and graduation of institutional quality is that they fail to take into data for all students and separately for Cal Grant consideration characteristics of schools’ students. recipients, as well as job placement and earnings For example, open access institutions have poorer data by program. The commission is in the process student outcomes than selective ones because of developing regulations for reporting these data, they do not limit admission to students who are including definitions and time frames. The purpose academically well prepared. This is evident in the of these new disclosure requirements is to give default rates for community colleges shown in prospective students information that will help Figure 1, which overlap substantially with those them choose schools. We have already discussed of equally nonselective for-profit institutions. It is using graduation rates for Cal Grant recipients in also evident in graduation rates for open-access determining school eligibility. Some of the other institutions. As a result, these measures could new measures also could be used for this purpose create a disincentive for institutions to serve in the future. Overall data could be used as a proxy disadvantaged students. for institutional quality, and outcome data for Cal Take Into Consideration Student Population Grant recipients could be used to monitor the state’s Served. Certain analytic approaches are able investment in these students. At this time, however, to tease out an institution’s impact on student we do not recommend considering these additional outcomes by comparing it with other institutions measures for eligibility determination because CSAC serving similar students. Given such analytical is still refining the definitions for the measures tools increasingly are available, we recommend and schools have not completed any reporting the Legislature consider adjusting default rates, cycles. In addition, information on some of these graduation rates, and other outcome measures for outcomes already is publicly available from federal, students’ characteristics (including their financial state, and institutional sources, but the specific need and level of academic preparation). While we measures differ. Until there is broader agreement believe maintaining some limit for default rates about how these outcomes should be measured, we is reasonable, the current limit of 15.5 percent do not recommend using them to determine school may be too strict for a school serving primarily eligibility. Moving forward, however, these other disadvantaged students. At the same time, this measures likely will become more viable options for standard may be too lax for a school with less assessing institutional quality. disadvantaged, more academically prepared Consider Variations on Federal 90/10 Rule. students. The Legislature could use the results of Another federal standard the state could consider the more sophisticated calculations that control for measures institutions’ dependence on public 14 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t funding. This measure, known as the 90/10 rule, cycle that is underway at the time of budget requires for-profit colleges to get at least 10 percent enactment. Such implementation can leave students of their revenue from sources other than Title IV at newly ineligible schools without sufficient federal student aid (which includes federal grants, time to make alternative plans for the imminent loans, and work-study funds). Other sources academic year. For example, the eligibility changes include tuition paid by students, state and private approved in 2011 and 2012 took effect after most financial aid, and some federal aid including students already had applied for school, been veterans’ education benefits. The measure shows admitted, received their financial aid offers, and whether other payers, including students, think made decisions regarding attendance. Although the school provides sufficient value to justify their some students were able to enroll in community investment. The state could consider variations colleges, they faced limited course availability. of this requirement—for example, requiring that Admissions to University of California and CSU at least 10 percent of an institution’s revenue be already were closed by the effective dates. In derived from nongovernment sources. addition to the problems it poses for students, the short implementation timeline places a burden R o eCoMMenD theR on campuses, whose financial aid offices must C p hanges to RoCess repackage aid for their Cal Grant recipients (for Recommend Changing Certification Date example, to offset reduced or eliminated Cal Grant From October 1 to November 1. To facilitate awards). CSAC’s data collection, we recommend moving Even Longer Implementation Lag May Be the certification date to November 1 instead of Warranted in Some Cases. Though a one-year October 1. This better reflects the U.S. Department implementation lag likely is reasonable in many of Education’s schedule for posting graduation cases, we recommend a longer phase-in for rates to IPEDS. Additionally, we recommend the some changes. For example, a new standard that Legislature clarify that CSAC should use the most requires consultation with institutions regarding recent publicly available data, published by the specific metrics to be used may require a longer department in any form, for its annual certification. implementation lag. Likewise, for changes that Avoid Changes During an Award Cycle could affect large numbers of students, both Already Underway. Moving forward, we students and schools should have sufficient notice— recommend the Legislature not implement and time to improve their outcomes—before the eligibility changes during the Cal Grant award changes become effective. CoNCLuSioN New standards for Cal Grant participation from eligibility the new rules have reduced Cal have saved money in the short term and focused Grant recipients’ college choices and—at least in state financial aid resources on schools with better the short term—their access to postsecondary student outcomes (as measured by graduation education. Although they have generally worked rates and student loan default rates). At the same as intended, the new standards have some time, by eliminating most for-profit schools drawbacks that could be addressed by adjusting www.lao.ca.gov Legislative Analyst’s Office 15 An LAO RepOR t for differences in student characteristics and, time for students and institutions to adapt to for the graduation rate requirement, making it eligibility changes. Finally, we recommend moving specific to Cal Grant recipients and applying the the annual certification date from October 1 to standard to all institutions. We recommend the November 1 and avoiding changes during award Legislature maintain the new standards (with cycles that already are underway. With these these adjustments) and continue monitoring their recommended modifications, we believe the effects. We also suggest alternative measures to eligibility standards will better target Cal Grant explore as new information becomes available. investments to institutions that are effectively We recommend providing sufficient phase-in serving students and the state. 16 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t APPENdix Cal Grant institutional Eligibility Provisions (2) (A) The institution shall provide information as Amended by Chapter 7, Statutes of on where to access California license examination 2011 and Chapter 38, Statutes of 2012 passage rates for the most recent available year from graduates of its undergraduate programs leading Education Code Title 3, Division 5, Part 42, to employment for which passage of a California Chapter 1.7 licensing examination is required, if that data is 69432.7 (l) (1) “Qualifying institution” means an electronically available through the Internet Web institution that complies with paragraphs (2) and (3) site of a California licensing or regulatory agency. and is any of the following: For purposes of this paragraph, “provide” may (A) A California private or independent exclusively include placement of an Internet Web postsecondary educational institution that site address labeled as an access point for the data participates in the Pell Grant Program and in at least on the passage rates of recent program graduates on two of the following federal campus-based student the Internet Web site where enrollment information aid programs: is also located, on an Internet Web site that (i) Federal Work-Study. provides centralized admissions information for (ii) Perkins Loan Program. postsecondary educational systems with multiple (iii) Supplemental Educational Opportunity campuses, or on applications for enrollment or other Grant Program. program information distributed to prospective (B) A nonprofit institution headquartered students. and operating in California that certifies to the (B) The institution shall be responsible for commission that 10 percent of the institution’s certifying to the commission compliance with the operating budget, as demonstrated in an audited requirements of subparagraph (A). financial statement, is expended for purposes (3) (A) The commission shall certify by of institutionally funded student financial aid October 1 of each year the institution’s latest in the form of grants, that demonstrates to the three-year cohort default rate and graduation rate commission that it has the administrative capacity as most recently reported by the United States to administer the funds, that is accredited by the Department of Education. Western Association of Schools and Colleges, and (B) For purposes of the 2011-12 academic year, that meets any other state-required criteria adopted an otherwise qualifying institution with a three-year by regulation by the commission in consultation cohort default rate reported by the United States with the Department of Finance. A regionally Department of Education that is equal to or greater accredited institution that was deemed qualified than 24.6 percent shall be ineligible for initial and by the commission to participate in the Cal Grant renewal Cal Grant awards at the institution, except Program for the 2000-01 academic year shall retain as provided in subparagraph (F). its eligibility as long as it maintains its existing (C) For purposes of the 2012-13 academic year, accreditation status. and every academic year thereafter, an otherwise (C) A California public postsecondary qualifying institution with a three-year cohort educational institution. default rate that is equal to or greater than 15.5 percent, as certified by the commission on www.lao.ca.gov Legislative Analyst’s Office 17 An LAO RepOR t October 1, 2011, and every year thereafter, shall be (I) The maximum Cal Grant A and B awards ineligible for initial and renewal Cal Grant awards at specified in the annual Budget Act shall be reduced the institution, except as provided in by 20 percent. subparagraph (F). (II) The reductions specified in this (D) (i) An otherwise qualifying institution subparagraph shall not impact access costs as that becomes ineligible under this paragraph for specified in subdivision (b) of Section 69435. initial and renewal Cal Grant awards shall regain its (ii) This subparagraph shall become inoperative eligibility for the academic year for which it satisfies on July 1, 2013. the requirements established in subparagraph (B), (G) For purposes of the 2012-13 academic year, (C), or (G), as applicable. and every academic year thereafter, an otherwise (ii) If the United States Department of Education qualifying institution with a graduation rate of corrects or revises an institution’s three-year cohort 30 percent or less for students taking 150 percent default rate or graduation rate that originally or less of the expected time to complete degree failed to satisfy the requirements established in requirements, as reported by the United States subparagraph (B), (C), or (G), as applicable, and the Department of Education and as certified by the correction or revision results in the institution’s commission pursuant to subparagraph (A), shall three-year cohort default rate or graduation rate be ineligible for initial and renewal Cal Grant satisfying those requirements, that institution shall awards at the institution, except as provided for in immediately regain its eligibility for the academic subparagraphs (F) and (I). year to which the corrected or revised three-year (H) Notwithstanding any other law, the cohort default rate or graduation rate would have requirements of this paragraph shall not been applied. apply to institutions with 40 percent or less (E) An otherwise qualifying institution of undergraduate students borrowing federal for which no three-year cohort default rate student loans, using information reported to or graduation rate has been reported by the the United States Department of Education for United States Department of Education shall be the academic year two years before the year in provisionally eligible to participate in the Cal Grant which the commission is certifying the three-year Program until a three-year cohort default rate or cohort default rate or graduation rate pursuant to graduation rate has been reported for the institution subparagraph (A). by the United States Department of Education. (I) Notwithstanding subparagraph (G), an (F) (i) An institution that is ineligible for initial otherwise qualifying institution with a three-year and renewal Cal Grant awards at the institution cohort default rate that is less than 10 percent and under subparagraph (B), (C), or (G) shall be eligible a graduation rate above 20 percent for students for renewal Cal Grant awards for recipients who taking 150 percent or less of the expected time to were enrolled in the ineligible institution during the complete degree requirements, as certified by the academic year before the academic year for which commission pursuant to subparagraph (A), shall the institution is ineligible and who choose to renew remain eligible for initial and renewal Cal Grant their Cal Grant awards to attend the ineligible awards at the institution through the 2016-17 institution. Cal Grant awards subject to this academic year. subparagraph shall be reduced as follows: 18 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t (J) The commission shall do all of the (m) “Satisfactory academic progress” means following: those criteria required by applicable federal (i) Notify initial Cal Grant recipients seeking standards published in Title 34 of the Code of to attend, or attending, an institution that is Federal Regulations. The commission may adopt ineligible for initial and renewal Cal Grant awards regulations defining “satisfactory academic under subparagraph (C) or (G) that the institution progress” in a manner that is consistent with those is ineligible for initial Cal Grant awards for the federal standards. academic year for which the student received an 69433.2. (a) As a condition for its voluntary initial Cal Grant award. participation in the Cal Grant Program, each Cal (ii) Notify renewal Cal Grant recipients Grant participating institution shall, beginning attending an institution that is ineligible for initial in 2012, annually report to the commission, and renewal Cal Grant awards at the institution and as further specified in the institutional under subparagraph (C) or (G) that the student’s participation agreement, both of the following for Cal Grant award will be reduced by 20 percent, or its undergraduate programs: eliminated, as appropriate, if the student attends (1) Enrollment, persistence, and graduation the ineligible institution in an academic year in data for all students, including aggregate which the institution is ineligible. information on Cal Grant recipients. (iii) Provide initial and renewal Cal Grant (2) The job placement rate and salary and recipients seeking to attend, or attending, an wage information for each program that is either institution that is ineligible for initial and renewal designed or advertised to lead to a particular type Cal Grant awards at the institution under of job or advertised or promoted with a claim subparagraph (C) or (G) with a complete list of all regarding job placement. California postsecondary educational institutions (b) Commencing the year after the commission at which the student would be eligible to receive an begins to receive reports pursuant to subdivision unreduced Cal Grant award. (a), the commission shall provide both of the (K) By January 1, 2013, the Legislative Analyst following on its Internet Web site: shall submit to the Legislature a report on the (1) The information submitted by a Cal Grant implementation of this paragraph. The report shall participating institution pursuant to subdivision be prepared in consultation with the commission, (a), which shall be made available in a searchable and shall include policy recommendations for database. appropriate measures of default risk and other (2) Other information and links that are direct or indirect measures of effectiveness in useful to students and parents who are in the quality or educational institutions participating in process of selecting a college or university. This the Cal Grant Program, and appropriate scores for information may include, but not be limited to, those measures. It is the intent of the Legislature local occupational profiles available through the that appropriate policy and fiscal committees Employment Development Department’s Labor review the requirements of this paragraph and Market Information Data Library. consider changes thereto. www.lao.ca.gov Legislative Analyst’s Office 19 An LAO RepOR t LAO Publications This report was prepared by Judy Heiman and reviewed by Jennifer Kuhn. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 20 Legislative Analyst’s Office www.lao.ca.gov