The 2022-23 Budget: Student Financial Aid

The 2022-23 Budget: Student Financial Aid Summary Brief Covers Student Financial Aid Proposals at Three Departments. This brief analyzes the Governor’s General Fund budget proposals related to student financial aid at the California Student Aid Commission (CSAC), the Scholarshare Investment Board (SIB), and the Department of Financial Protection and Innovation (DFPI). Governor’s CSAC Proposals Are Warranted to Implement Program Expansions. The 2021-22 budget enacted several CSAC program expansions—including an expansion of Cal Grant eligibility for community college students, a revamp of the Middle Class Scholarship program, multiple one-time initiatives, and a new requirement for school districts to verify that high school seniors apply for financial aid. The Governor’s budget includes $479,000 ongoing and five positions for CSAC to implement these program expansions. Given the number, magnitude, and complexity of the expansions, we recommend approving the five positions at minimum. Beyond the five positions, the Legislature may wish to work with the administration and CSAC to determine if additional staffing is warranted. The Governor also proposes $500,000 one time to expand CSAC’s Cash for College program to support the implementation of the new financial aid application requirement. We recommend approving the one-time funds and adding a reporting requirement to inform future decisions about the program’s ongoing funding level. Some of Governor’s SIB Proposals Are Justified, While Others Could be Strengthened. The 2021-22 budget expanded SIB’s California Kids Investment and Development Savings (CalKIDS) program to provide college savings accounts to low-income public school students (in addition to all newborns). The Governor’s budget includes $238,000 ongoing and two positions for SIB to administer the expanded CalKIDS program. We recommend approving both positions based on the increased workload. The Governor also proposes three initiatives totaling $5.4 million ongoing and $4.6 million one time to support CalKIDS participant financial literacy, participant notifications, and a marketing campaign. We recommend consolidating these three similar proposals into one outreach initiative to provide a more coordinated message to participants and potentially reduce overall costs. We further recommend withholding action on the financial literacy component and requesting the administration provide more detail on the proposed activities and associated cost. DFPI Student Loan Proposal Raises a Few Key Issues to Consider. The Governor’s budget includes $10 million one time to DFPI for student loan borrower outreach. The administration intends to submit a more detailed proposal in the spring. Upon receiving the full proposal, the Legislature could consider whether the proposed activities would address gaps in existing student loan resources, target borrowers facing greater repayment challenges, and be appropriate for one-time funding. GABRIEL PETEK | LEGISLATIVE ANALYST FEBRUARY 2022 2022-23 BUDGET INTRODUCTION This brief is organized around the Governor’s administered by the California Student Aid 2022-23 budget proposals related to student Commission (CSAC), the Scholarshare Investment financial aid. The brief has three sections. The Board (SIB), and the Department of Financial sections are focused on the financial aid programs Protection and Innovation (DFPI), respectively. CALIFORNIA STUDENT AID COMMISSION In this section, we cover the Governor’s lower award amounts for tuition and nontuition budget proposals for CSAC. We begin with an expenses. Across all three Cal Grant award overview of CSAC’s budget. Next, we provide types, a supplemental award providing additional updates on cost estimates for the Cal Grant and nontuition coverage is available to students with Middle Class Scholarship programs. We then dependent children, as well as current and former analyze the Governor’s proposals to provide foster youth. CSAC with new staff positions, expand the Cash for College program, and modify the Dreamer Service Incentive Figure 1 Grant program. Cal Grant Amounts Vary by Award Type and Sector Maximum Annual Award Amount, 2021-22 OVERVIEW Below, we describe the major Amount financial aid programs administered Tuition Coverage by CSAC, recap the key changes to Cal Grant A and Ba CSAC’s programs under the 2021-22 UC $12,570 budget, and provide an overview of the Nonprofit institutions 9,220 Governor’s 2022-23 budget for CSAC. WASC-accredited for-profit institutions 8,056 CSU 5,742 Major Programs Other for-profit institutions 4,000 Cal Grant C Cal Grants Are the State’s Largest Private institutions $2,462 Financial Aid Program. There are three Nontuition Coverage types of Cal Grant awards—Cal Grant A, B, and C. As Figure 1 shows, the Cal Grant A UC, CSU, and CCC students with dependent children $6,000 award types vary in the amount of tuition UC, CSU, and CCC foster youth 6,000 and nontuition coverage they provide. Cal Grant B Cal Grant A covers full systemwide UC, CSU, and CCC students with dependent children $6,000 tuition and fees at public universities UC, CSU, and CCC foster youth 6,000 and a fixed amount of tuition at private All other students 1,648 universities. Cal Grant B, in most Cal Grant C cases, provides the same amount of CCC students with dependent children $4,000 tuition coverage as Cal Grant A, while CCC foster youth 4,000 also providing an “access award” for All other CCC students 1,094 Private institution students 547 nontuition expenses such as food and housing. Cal Grant C, which is only a Cal Grant B recipients generally do not receive tuition coverage in their first year. available to students enrolled in career WASC = Western Association of Schools and Colleges. technical education programs, provides 2 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Cal Grants Have Financial and Other Recap of 2021-22 Budget Actions Eligibility Criteria. To qualify for Cal Grants, 2021-22 Budget Expanded Cal Grant students must meet certain income and asset Eligibility for Community College Students. criteria, which vary by family size and are adjusted Until the 2021-22 award year, only recent high annually for inflation. For example, in the 2021-22 school graduates and transfer students under age award year, a dependent student from a family 28 qualified for a Cal Grant entitlement award. of four must have an annual household income The 2021-22 budget expanded entitlement awards of under $110,400 to qualify for Cal Grant A or C, to California Community College (CCC) students and under $58,100 to qualify for Cal Grant B. regardless of their age and time out of high school. Students must also have a minimum grade point CCC students who receive an award under this average, which ranges from 2.0 to 3.0 depending new provision will remain eligible for the award on award type. Cal Grants are provided as after transferring to CSU or UC, but not after entitlements to recent high school graduates, transferring to a private institution. The 2021-22 transfer students under age 28, and (under a budget also included various smaller Cal Grant recent change described below in greater detail) augmentations, including a new supplemental community college students. The state also access award for foster youth and an increase in provides a limited number of competitive awards to the maximum tuition award for students attending other students—typically older students attending private nonprofit institutions. four-year universities. 2021-22 Budget Included Plan to Revamp Middle Class Scholarships Are the State’s Middle Class Scholarship Program. The 2021-22 Next Largest Financial Aid Program. The state budget agreement included a $515 million created the Middle Class Scholarship program augmentation beginning in 2022-23 to revamp in 2014-15 to provide partial tuition coverage the Middle Class Scholarship program. Whereas for certain California State University (CSU) and award amounts under the original program are University of California (UC) students. Students based on tuition charges, award amounts under qualify for the program if they have household the revamped program will be based on the total income and assets under a specified ceiling cost of attendance (tuition plus living costs). ($191,000 in 2021-22). The maximum award As Figure 2 on the next page illustrates, calculating under the original program is worth 40 percent a student’s Middle Class Scholarship award amount of systemwide charges when combined with all has become more complex. Under the revamped other public financial aid. Awards are graduated program, CSAC will first take into account other downward as household income increases, with the available gift aid, a student contribution from minimum award set at 10 percent of systemwide part-time work earnings, and a parent contribution charges. (Students do not receive an award if they for dependent students with a household income already are receiving the same amount of tuition of over $100,000. It then will deduct these coverage through other financial aid programs, amounts from a student’s total cost of attendance such as Cal Grants.) State law caps spending on to determine whether the student has remaining the original Middle Class Scholarship program at costs. CSAC will determine what percentage of $117 million annually and directs CSAC to prorate each student’s remaining costs to cover each award amounts to remain under the cap, if needed. year based on the annual appropriation for the CSAC is prorating award amounts for the first time program. The revamped program is expected to in 2021-22. (As described below, the program was serve significantly more students than the original recently revamped.) program, primarily because students receiving tuition coverage through other programs (who do not currently receive Middle Class Scholarship awards) will begin receiving nontuition coverage. www.lao.ca.gov 3 2022-23 BUDGET State Also Funded Three Major One-Time federal Temporary Assistance for Needy Families Initiatives at CSAC in 2021-22. Specifically, the (TANF). In 2022-23, state General Fund would state provided $500 million spread across five years comprise 89 percent of CSAC funding and federal (2021-22 through 2025-26) to expand the Golden TANF would comprise 10 percent. The remainder State Teacher Grant Program, which supports would come from various sources, including students in teacher preparation programs. The state reimbursements from other departments. provided $500 million to launch the Golden State Majority of New Spending Is Tied to Last Education and Training Grant Program, which Year’s Budget Agreement. Figure 4 shows the supports displaced workers. Additionally, the state ongoing and one-time spending changes proposed provided $500 million spread across two years for CSAC. The largest ongoing change (the Middle to establish the Learning-Aligned Employment Class Scholarship revamp) and the two largest Program, which provides work-study opportunities one-time changes (continued funding for the to students at CCC, CSU, and UC. Learning-Aligned Employment and Golden State 2021-22 Trailer Legislation Created New Teacher Grant programs) all were included in the Financial Aid Application Requirement. 2021-22 budget agreement. In addition to these Currently, just over half of high seniors attending previously planned changes, the Governor’s budget California public schools complete a Free makes caseload adjustments to Cal Grants and Application for Federal Student Aid (FAFSA) other financial aid programs, as well as includes or California Dream Act Application (CADAA). small augmentations related to implementing last The 2021-22 budget package included trailer year’s program expansions. legislation creating a new requirement beginning in 2022-23 Figure 2 for school districts to verify that all high school seniors complete New Middle Class Scholarship a FAFSA or CADAA form, unless Formula Takes Effect in 2022-23 the student submits an opt-out Reflects Illustrative CSU Dependent Student Living Off-Campus form or receives an exemption from the district. Districts will also Example 1 Example 2 be required to direct students to Household Income $50,000 $120,000 relevant support services, including Original Program programs operated by CSAC, Systemwide tuition and fees $5,742 $5,742 college readiness organizations, Percentage based on household incomea 40% 40% and immigration resource centers, Award Amount —b $2,297 among others. This requirement Revamped Program is expected to increase applicants Cost of attendance $30,000 $30,000 for CSAC’s financial aid programs, Other federal, state, and institutional gift aidc -10,935 — Student contribution from work earnings -7,898 -7,898 as well as demand for CSAC’s 33% of parent contribution from federal EFCd — -9,570 outreach programs. Student’s Remaining Costs ($11,167) ($12,532) Percentage based on annual appropriation 24% 24% Overview of Award Amounts $2,680 $3,008 2022-23 Budget a The maximum share of systemwide tuition and fees covered is set at 40 percent. In 2021-22, CSAC is prorating award amounts to stay within the program spending cap of $117 million. Students with Governor Proposes a household income of up to $127,000 are eligible for the largest award. Students with a household $3.9 Billion for CSAC in 2022-23. income of more than $127,000 and up to $191,000 are eligible for an award amount that is graduated downward for each $1,000 increase in income. As Figure 3 shows, CSAC funding b Under the original program, students receiving tuition coverage through Cal Grants or other financial increases $282 million (8 percent) aid do not receive a Middle Class Scholarship award. c The amount also includes any private scholarships in excess of the sum of the student contribution over the revised 2021-22 level. and parent contribution. The two main fund sources for d Only applies to dependent students with a household income of more than $100,000. CSAC are state General Fund and EFC = expected family contribution. 4 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Figure 3 CSAC Budget Has Expanded Notably in Past Two Years (Dollars in Millions) Change From 2021-22 2020-21 2021-22 2022-23 Actual Revised Proposed Amount Percent Spending Local Assistance Cal Grants $2,256 $2,612 $2,799 $188 7% Middle Class Scholarships 114 117 632 515 440 Learning-Aligned Employment Program — 200 300 100 50 Golden State Teacher Grants 8 112 98 -14 -13 Golden State Education and Training Grants — 500 — -500 -100 Other programsa 28 34 29 -6 -17 Subtotals ($2,406) ($3,576) ($3,858) ($283) (8%) State operations $23 $21 $20 -$1 -3% Totals $2,429 $3,596 $3,878 $282 8% Funding Ongoing General Fund $1,994 $2,356 $3,059 $703 30% One-time General Fund 6 334 399 65 19 Federal TANF 400 400 400 — — Federal American Rescue Plan — 473 — -473 -100 Other funds and reimbursements 28 34 21 -13 -39 a Includes Assumption Program of Loans for Education, California Military Department GI Bill Awards, Cash for College, Chafee Foster Youth Program, John R. Justice Program, Law Enforcement Personnel Dependents Scholarships, State Nursing Assumption Program of Loans for Education for Nursing Faculty, and Student Opportunity and Access Program. CSAC = California Student Aid Commission and TANF = Temporary Assistance for Needy Families. Figure 4 COST ESTIMATES Governor’s Budget Includes Substantial Below, we provide an update on cost estimates Increases for CSAC Programs for the Cal Grant and Middle Class Scholarship programs under the Governor’s budget. 2022-23 (In Millions) Cal Grants Ongoing Changes Middle Class Scholarship revamp $515 Governor’s Budget Adjusts 2021-22 Cal Grant Cal Grant caseload adjustments 188 Spending Estimates Downward. The revised New positions —a current-year spending level is $44 million below Other adjustments -6 the level enacted in the 2021-22 Budget Act. The Subtotal ($697) revision reflects the most recent Cal Grant caseload One-Time Initiatives estimates, which CSAC prepared in October 2021. Learning-Aligned Employment programb $300 Golden State Teacher Grantsc 98 The most notable change since budget enactment Cash for College expansion 1 is a decrease in the estimated cost of expanding Subtotal ($399) entitlement awards for CCC students, due to revised Remove 2021-22 one-time funding -$813 assumptions about the number of recipients. Total Changes $282 CSAC began making offers and issuing payments a Governor’s budget provides $479,000 for this purpose. for these awards in late fall. As more data becomes b Reflects second year of two-year plan (per 2021-22 budget available on paid awards, CSAC will further refine its agreement). c The 2021-22 Budget Act appropriated $500 million for this purpose. caseload estimates. The administration, in turn, is The budget act included language specifying that no more than expected to update the spending level for these and $100 million was to be spent annually from 2021-22 through 2025-26. Amount shown reflects anticipated spending in year two. all other Cal Grant awards at the May Revision to CSAC = California Student Aid Commission. reflect more recent program data. www.lao.ca.gov 5 2022-23 BUDGET Governor’s Budget Reflects Projected Increase enough to cover an estimated 24 percent of total in Cal Grant Spending in 2022-23. From the revised program costs (with each student’s award adjusted 2021-22 spending level, the Governor’s budget accordingly). Our Middle Class Scholarship provides a $188 million (7 percent) augmentation for Program table compares projected recipients, Cal Grants in 2022-23 to align with projected cost spending, and award amounts under the revamped increases. We summarize the projected changes by program in 2022-23, compared to under the original segment and award type in our Cal Grant Spending program in 2020-21 and 2021-22. and Cal Grant Recipients tables. The most notable factor driving the cost increase in 2022-23 is the NEW POSITIONS continued implementation of the CCC entitlement Below, we provide background on CSAC expansion. The cost of the CCC entitlement awards staffing, describe the Governor’s proposal are projected to increase significantly as the first to add new positions to implement program cohort of recipients (from 2021-22) renews their expansions, assess that proposal, and provide an awards. In addition, some of these recipients are associated recommendation. expected to transfer to CSU or UC, where award amounts are larger. Another factor contributing to the Background Cal Grant cost increase in 2022-23 is higher tuition CSAC Has About 140 Authorized Positions award amounts at UC, where the Board of Regents Across Several Divisions. In 2021-22, CSAC has adopted a plan to raise systemwide charges has 137.5 authorized ongoing positions, as well for new resident undergraduates from $12,570 to as 2.2 temporary positions. These positions span $13,104 in 2022-23. As with its 2021-22 spending seven divisions, the largest of which are program estimates, the administration is expected to update administration and services, information technology its 2022-23 spending projections at the May Revision (IT), fiscal and administrative services, and the to reflect more recent program data. executive division. As of January, CSAC reports that 22.5 positions (16 percent) were vacant, with Middle Class Scholarship the IT division accounting for 40 percent of the Revamped Program Is Estimated to Cost vacancies. CSAC indicates the majority of its vacant $2.6 Billion at Full Implementation. CSAC has positions have been unfilled for less than three also updated the state’s cost estimate for the months and it is actively recruiting to fill them. revamped Middle Class Scholarship program, 2021-22 Budget Did Not Increase Staffing to using more detailed student-level data on cost Implement Program Expansions. Although the of attendance and resources than was available 2021-22 budget enacted major expansions to the when the 2021-22 budget was enacted. Based on Cal Grant and Middle Class Scholarship programs the updated estimates, it would cost $2.6 billion (described in the “Overview” section of this brief), to cover 100 percent of each student’s remaining the budget did not provide any additional funding or costs after accounting for other available gift aid, positions for CSAC to administer these programs. a student work contribution, and any applicable CSAC also has not yet received any funding or parent contribution. (This estimated cost is only positions associated with the new financial aid slightly less than the $2.8 billion that the state is application requirement for high school seniors, projected to spend on Cal Grants in 2022-23.) which is scheduled to take effect in 2022-23. Governor’s Budget Partially Funds Revamped CSAC Has Received Funding to Administer Program. In accordance with the 2021-22 budget One-Time Initiatives. Trailer legislation to the agreement, the Governor’s budget provides an 2021-22 budget authorized CSAC to use between augmentation of $515 million ongoing General 0.5 percent to 1.5 percent of the funds allocated Fund for the revamped Middle Class Scholarship for its various one-time initiatives to undertake program. When combined with current funding for associated administrative activities. These the original program, the augmentation brings total one-time carve-outs total $7.5 million for the program funding to $632 million in 2022-23. This is Golden State Teacher Grant Program, with funds 6 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET available through June 30, 2026; $5 million for Assessment the Golden State Education and Training Grant Proposed Positions Are Linked to New Program, with the bulk of these funds available Workload. Under the Governor’s budget, CSAC’s through June 30, 2024; and $1 million for the local assistance spending in 2022-23 is $1.5 billion Learning-Aligned Employment Program, with (60 percent) higher than the level two years earlier funds available through June 30, 2031. Under in 2020-21. Given the magnitude of the recent the Governor’s budget, CSAC would receive an augmentations, together with the number of new additional $1.5 million in 2022-23 for administration programs and the added complexity of some of the of the Learning-Aligned Employment Program, with programs, we think staffing increases at CSAC are these funds also available through June 30, 2031. warranted. Moreover, the administration and CSAC Regarding position authority, CSAC previously have provided information about CSAC’s new received four positions to administer the Golden workload justifying the specific positions proposed. State Teacher Grant Program when the initiative CSAC Has Also Identified Further Staffing first launched in 2020-21. To date, CSAC has not Needs. Beyond the five positions included in received additional position authority to administer the Governor’s budget, CSAC has requested the other two initiatives. (Without additional 22 additional positions in 2022-23. These consist of position authority, CSAC would likely need to rely 14 positions related to program administration and on limited-term positions or redirect some of its outreach, as well as 8 positions to expand support existing positions for these purposes until the functions related to IT, government and external initiatives expire.) relations, budget, and human resources. Some Proposals of these positions could be warranted based on workload increases. The Legislature would need Governor Proposes Five Positions to more information, including workload analyses, to Implement Program Expansions. The Governor’s assess how many and which additional positions budget provides $479,000 ongoing General Fund to provide. and five positions for CSAC to implement the program expansions enacted last year. The five Recommendation proposed positions consist of: Approve the Five Positions at Minimum. • Two program technicians for CSAC’s Given the workload increases associated call center to address a higher volume with recent program expansions at CSAC, we of student inquiries due to the new and recommend approving the five positions included expanded programs. in the Governor’s budget. Beyond these five • One associate governmental program analyst positions, the Legislature may wish to work with to support school districts with the new the administration and CSAC to determine if financial aid application requirement. any additional staffing is needed to ensure that CSAC has the capacity to successfully implement • One attorney to provide legal counsel related the many new and expanded programs included in to the new and expanded programs. last year’s budget. • One research data specialist to support the Cradle to Career data system and other CASH FOR COLLEGE programs. (This position would be funded by $150,000 ongoing General Fund provided Below, we provide background on the Cash to CSAC in 2021-22 for the Cradle to Career for College program, describe the Governor’s data system.) proposal to provide a one-time augmentation for this program, assess that proposal, and provide an associated recommendation. www.lao.ca.gov 7 2022-23 BUDGET Background Recommendation Cash for College Program Assists Students Approve Cash for College Funds and Add With Financial Aid Applications. CSAC’s Cash Reporting Requirement. Given the anticipated for College outreach program provides workshops increase in demand for Cash for College to help students complete their FAFSA or CADAA workshops, we recommend approving the forms. In 2021-22, the program is providing an Governor’s proposal to provide additional one-time estimated 900 workshops across the state. funding for this program in 2022-23—the first The state provides $328,000 ongoing General Fund year of the financial aid application requirement. for the program. These funds are allocated to the In the coming years, as more information becomes seven regional coordinating organizations (typically available on how districts are implementing this nonprofit entities) that help administer the program, requirement, the Legislature likely will want to supporting the high schools and colleges that host consider what ongoing funding level to provide the workshops. for the Cash for College program. To inform future funding decisions, we recommend the Proposal Legislature add provisional language requiring Governor Proposes One-Time Expansion CSAC to submit a report by November 1, 2023 of Cash for College Program. The Governor’s on the Cash for College program’s activities in budget provides $500,000 one-time General 2022-23. This report would include: (1) the areas Fund to augment the Cash for College program, of the state covered by the Cash for College bringing total program funding to $828,000 in program, (2) the number of workshops hosted, 2022-23. The administration indicates the proposed (3) the number of students participating in those augmentation would be allocated to the seven workshops, and (4) the number of FAFSA or CADAA existing regional coordinating organizations, as well forms completed. as up to 15 new organizations in areas of the state that are not currently covered by the program and DREAMER SERVICE have low financial aid application rates. CSAC has INCENTIVE GRANTS identified various such areas across the state, Below, we provide background on the including in the Far North, North Coast, Central California Dreamer Service Incentive Grant (DSIG) Valley, and Central Coast regions. and California Dream Loan programs, discuss Assessment the Governor’s trailer bill language proposals to increase DSIG award amounts and redirect Ongoing Demand for Cash for College any unexpended funds to the Dream Loan Workshops Is Likely to Increase. As part of the program, assess those proposals, and provide financial aid application requirement enacted last associated recommendations. year, districts are to direct students to relevant support services in completing their FAFSA or CSAC Recently Launched DSIG Program. CADAA forms. Accordingly, student demand for The state created this program in the 2019-20 Cash for College workshops is likely to increase budget to provide additional nontuition aid to as the new requirement takes effect in 2022-23. undocumented students receiving a Cal Grant B Given that the new requirement is ongoing, student award who complete a community service demand for financial aid application support may requirement. After the onset of the pandemic, remain heightened in future years. At this stage, the state redirected program funding in 2019-20 however, there are many open questions about and 2020-21 toward emergency grants for the implementation of the requirement—including undocumented students. As a result, CSAC is what types of student support districts will implementing the program for the first time in provide, whether those activities will constitute a 2021-22. The program provides awards of up state-reimbursable mandate, which other entities to $1,500 per semester to eligible students who will offer support, and what gaps in support complete 150 hours of service (or up to $1,000 per will remain. quarter for completing 100 hours of service). 8 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET The service requirement equates to about Proposals 10 hours per week. Part-time students receive Governor Proposes to Increase DSIG Award prorated award amounts, although they are Amounts… The proposed trailer bill language would required to complete the same number of service increase the maximum DSIG award amount from hours as full-time students. Program participation $1,500 to $2,250 per semester (or from $1,000 to for both full- and part-time students is limited to a $1,500 per quarter). Under this proposal, full-time total of eight semesters (or 12 quarters). students would in effect earn $15 per hour of DSIG Participation Is Much Lower Than service—equivalent to the state minimum wage Anticipated. State law limits participation in the for larger employers. Part-time students would program to 2,500 students at any one time—the continue to receive prorated awards. In addition, the maximum number that could receive the full proposed language would lower the limit on program award amount without exceeding the ongoing participants from 2,500 students to 1,667 students funding level of $7.5 million. In fall 2021, only about at any one time to keep program costs within the 100 students participated in the program. Of these current funding level. participants, about ten were part-time students. …And Redirect Unspent Funds to Dream CSAC has identified several possible explanations Loan Program. The proposed trailer bill language for the low participation rate, including the would allow the Director of Finance to transfer any availability of higher-paying work opportunities, unspent funds for the DSIG program beginning in the availability of emergency grants during the 2021-22 to UC and CSU to support the Dream Loan pandemic, and pandemic-related disruptions in program. These funds would be allocated to UC and service opportunities. CSU based on each segment’s share of Dream Loan State Also Supports Dream Loan Program at recipients in the most recent year for which this data UC and CSU. Chapter 754 of 2014 (SB 1210, Lara) is available. Based on 2020-21 data, about two-thirds created the California Dream Loan program of the redirected funds would go to UC. to provide loans to undocumented students Assessment with financial need. (Undocumented students are ineligible for federal student loans.) Under Proposed Increase in DSIG Award Amounts this program, UC and CSU campuses may Would Promote Participation. Given that award loans of up to $4,000 annually to eligible one possible reason for low participation in the students. Each participating campus maintains DSIG program is the availability of higher-paying a revolving fund for issuing loans and depositing work opportunities, the proposed trailer bill language repayments. At UC, the program is supported by could make the program more attractive to potential a combination of General Fund (set aside from the participants. Because the increased award amounts university’s base support) and other institutional align with the state minimum wage of $15 per hour, funds. At CSU, the program is primarily the program would be compensating students at supported by state lottery funds. In 2020-21, an hourly rate more comparable to what they could about 900 UC students received Dream Loan earn elsewhere. disbursements totaling $2.8 million, and about Award Amounts for Part-Time Students 460 CSU students received disbursements Would Remain Low. Under the proposed trailer totaling $1.5 million. The segments indicate that bill language, a student enrolled half-time and a participation is down from previous years, possibly student enrolled three-quarters time would receive due to decreased living costs for students who the equivalent of $7.50 per hour and $11.25 per hour moved home during the pandemic, as well as the of service, respectively. Given that these rates are availability of emergency grants. well below the state minimum wage, they are very likely to continue discouraging program participation among part-time students. Moreover, we see no strong rationale for compensating part-time students at a lower hourly rate for their service than full-time students. www.lao.ca.gov 9 2022-23 BUDGET No Demonstrated Need for Additional Dream Reject Redirection of Unspent Funds to Loan Funding. At both UC and CSU, current Dream Loans. Given that current funding for funding for the Dream Loan program is sufficient the Dream Loan program is sufficient to meet to meet student demand. Neither segment has demand, we recommend rejecting the redirection needed to maintain a waitlist or turn students of unspent DSIG funds to Dream Loans. Instead, away from the program. Moreover, both segments the Legislature could allow unspent DSIG funds to tend to have unspent funds in the program. This is revert to the General Fund. In future years, as more particularly the case at UC, which had an ending data becomes available on DSIG participation, the balance of $12.8 million in its Dream Loan revolving Legislature could revisit the ongoing funding level fund in 2020-21—more than four times total to align it better with demand, thus minimizing the program spending in that year. amount of unspent DSIG funds. Add Reporting Requirement for DSIG Recommendations Program. To inform future funding decisions, Modify Proposed Increase in DSIG Award we recommend further amending the proposed Amounts. We think the Governor’s proposed trailer bill language to require CSAC to submit a increase to the maximum award amount is a report annually starting November 1, 2022 on the reasonable way to increase participation in DSIG program. At a minimum, we recommend this an undersubscribed program. However, we report include the number of program recipients recommend amending the language to remove and the total amount of aid provided in the the proration of awards for part-time students, as previous award year, by segment. The Legislature this would address an additional disincentive for may also wish for the report to include a list of these students to participate. With this amendment, organizations providing service opportunities under the program would compensate both part- and the program and the number of hours served at full-time students at an hourly rate equivalent to the each organization. state minimum wage. SCHOLARSHARE INVESTMENT BOARD In this section, we cover the Governor’s continuously appropriated. While the program budget proposals for SIB. We provide was intended to serve all children born on or after background on the California Kids Investment July 1, 2020, the eligibility date was postponed in and Development Savings (CalKIDS) program; the 2021-22 budget to a SIB-determined date no describe the Governor’s proposals to fund later than July 1, 2022. The 2021-22 budget also program administration, marketing, and provided $15.3 million ongoing General Fund to SIB outreach; assess these proposals; and offer to support deposits for future cohorts of newborns. associated recommendations. Upon launching, the program is expected to enroll approximately 450,000 newborns annually. Background 2021-22 Budget Added Low-Income Public State Created CalKIDS Program in 2019-20 School Students to Program. The 2021-22 to Serve All Newborns. Under the original budget also added a new component to the program, the state is to open a college savings CalKIDS program. Under this new component, the account for every newborn in California and provide state is to open a college savings account for every a seed deposit of at least $25 in each account. low-income public school student (as identified The 2019-20 budget provided $25 million one-time under the Local Control Funding Formula) in grades General Fund to SIB to launch the program. 1 through 12 and provide a deposit of $500 in This funding was deposited into the newly created each account. Students qualify for an additional CalKIDS Program Fund, from which funding is $500 deposit if they are foster youth and an 10 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET additional $500 deposit if they are homeless (for a analysts) to administer the CalKIDS program. maximum deposit of $1,500). The budget provided The positions would have various responsibilities, $1.8 billion one-time federal American Rescue Plan including but not limited to compiling and Act funds and $92 million one-time General Fund analyzing participant data, conducting marketing to provide these deposits in 2021-22. Similar to and outreach, assisting with regulations, and the accounts for newborns, SIB anticipates communicating with stakeholders. opening the accounts for low-income public school Governor Proposes Multiple Outreach students before July 1, 2022, with an associated Initiatives. As Figure 5 shows, the Governor also 3.5 million students added to the CalKIDS program. has three proposals related to CalKIDS outreach. Budget Agreement Also Added Future First, the Governor proposes $5 million ongoing Cohorts of Low-Income First Graders. General Fund for financial literacy outreach to The 2021-22 budget agreement also included inform CalKIDS participants and their families of the $170 million ongoing General Fund beginning in long-term benefits of saving for college. Second, 2022-23 to provide deposits for each incoming the Governor proposes $4 million one-time General cohort of first graders. The Governor’s 2022-23 Fund in 2022-23 to notify participants in grades budget includes these funds. The eligibility criteria 1 through 12 of their CalKIDS accounts, as well and award amounts will be the same as for public as $400,000 ongoing General Fund beginning in school students in 2021-22—meaning each 2023-24 to notify each incoming cohort of first low-income first grader will receive a deposit of graders. Third, the Governor proposes $1 million $500, and first graders who are foster youth or one-time General Fund in 2022-23 for a short-term homeless will receive additional $500 deposits. marketing campaign to increase awareness of the The state will add these deposits to the existing CalKIDS program upon its launch. CalKIDS accounts of any first graders who had an Assessment account created as a newborn, and it will create new accounts for any first graders who do not Proposed Positions Are Linked to New already have one. Approximately 320,000 first Workload. While the CalKIDS program was graders annually are expected to receive originally intended to serve newborns, the these deposits. 2021-22 Budget Act significantly expanded the size and complexity of the program by State Has Provided Some Resources for adding a new component serving 3.5 million Program Administration. In addition to the funding public school students, as well as an estimated provided for the college savings accounts, the 320,000 first graders annually in future years. 2021-22 budget included an ongoing augmentation In addition to opening accounts and providing of $700,000 to SIB for CalKIDS administrative deposits, SIB needs to oversee the accounts costs. Based on data from the administration, SIB is planning to use these funds for various expenses, including staffing and contract services. Figure 5 (Most notably, SIB intends to contract for the Governor Has Three CalKIDS IT platform it will use to administer the program.) Outreach Proposals SIB has had one staff position partially dedicated General Fund (In Millions) to CalKIDS since the program was first created in 2019-20. The 2021-22 budget did not add 2022-23 2023-24a any positions. Participant financial literacy $5.0 $5.0 Proposals Participant notifications 4.0 0.4 Marketing campaign 1.0 — Governor Proposes Two Positions for Totals $10.0 $5.4 Program Administration. The Governor’s budget a Reflects ongoing funding level. provides $238,000 ongoing General Fund and CalKIDS = California Kids Investment and Development Savings two positions (associate governmental program Program. www.lao.ca.gov 11 2022-23 BUDGET until each cohort reaches college age, as well Funding for Certain Outreach Activities as make payments from the accounts at that Has Not Yet Been Justified. In particular, limited time. (Under state law, any unspent funds in a justification has been provided for the financial participant’s account are to revert to the CalKIDS literacy outreach funding. The administration program when the participant reaches age indicates this initiative would allow SIB to produce 26, unless an appeal is submitted.) Given the informational materials, translate those materials ongoing workload associated with these changes, into various languages, update the program we think it is reasonable to increase staffing at website, and provide other financial literacy SIB. The administration has provided a workload activities to participants and their families. However, analysis justifying both proposed positions. the proposed funding level is not linked with the Some Outreach Is Needed if Program Is to cost of these activities. Instead, the administration Meet Its Objectives. The CalKIDS program is determined the proposed funding level based intended to expand college access, particularly on the combined one-time cost of the other two for low-income students. In order for the program initiatives (participant notifications and marketing to have the intended effect, participants and campaign). In addition, while the proposed funding their families need to know about their CalKIDS is ongoing, several of the proposed activities account and any deposits from the state, as well (including producing initial informational materials as how they can contribute their own funds toward and updating the website) would be one time. saving for college. Statute already requires SIB to Recommendations provide notifications containing this information Approve Two Positions and Associated to the parents of newborns. At a minimum, the Funding. Given the workload increases associated state would likely want SIB also to provide such with the recent expansion of the CalKIDS program, notifications to the families of participants in we recommend approving the two positions grades 1 through 12 and to each new cohort of proposed in the Governor’s budget and the participating first graders. Additional outreach associated funding. efforts, if designed well, could also have potential benefits. For example, SIB intends to use a portion Modify Outreach Proposals. Rather than of the proposed funds for a marketing campaign, funding separate initiatives for financial literacy potentially including television announcements, outreach, participant notification, and marketing, online advertisements, and social media. we recommend creating one combined initiative. These channels could potentially reach some Within that initiative, we recommend providing families who do not receive (or disregard) the at least the proposed $4 million one time and participant notifications. $400,000 ongoing for participant notification, as participants and their families need a basic level Opportunity Exists to Better Coordinate of awareness of their CalKIDS accounts for the Proposed Outreach Initiatives. The Governor’s program to have its intended effect. The Legislature three outreach proposals have similar purposes. could also consider including the proposed The participant notifications and marketing $1 million one-time General Fund for a short-term campaign are designed to make participants marketing campaign to further increase program aware of their accounts, while the financial literacy awareness. However, we recommend withholding outreach initiative is intended to inform participants action on the proposed $5 million ongoing for of the benefits of those accounts (for example, by financial literacy outreach and requesting the introducing participating families to the concept of administration develop a more detailed proposal. compound interest). Incorporating these separate Such a proposal would identify the specific financial components into one initiative could provide a literacy outreach activities that would occur, the more coordinated message to students and their estimated cost of those activities, the duration families—simultaneously notifying them of their of those costs (one time vs. ongoing), and any accounts and informing them of the associated opportunities to coordinate or consolidate these benefits. A consolidated approach could also outreach activities with the related participant reduce duplication across initiatives, potentially notification and marketing activities. leading to lower overall costs. 12 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION In this section, we cover the Governor’s budget of Education data, we estimate that the three-year proposal for student loan borrower assistance default rate was approximately 6 percent among at DFPI. We first provide background on student borrowers in the 2017-18 cohort who attended loans, as well as DFPI’s role in assisting student California institutions. loan borrowers. We then describe the Governor’s Certain Groups of Borrowers Have Relatively proposal to launch a related outreach initiative and High Default Rates. National studies have found provide a few issues for legislative consideration. that student loan default rates are higher for students who do not complete a college degree or Background certificate, compared to students who do complete. Many Californians Have Student Loan Debt. As Figure 6 shows, default rates also vary by In California, 3.9 million individuals owe a combined segment of attendance, with borrowers attending $145 billion in federal student loan debt. (The community colleges and for-profit institutions more federal government issues the vast majority of likely to default. Moreover, research has found student loans, with the remainder coming from notable demographic disparities. For example, private lenders including financial institutions.) a 2019 study from the Federal Reserve Bank of Although the federal government suspended San Francisco and the San Francisco Treasurer’s repayment on student loans at the onset of Office of Financial Empowerment found that the pandemic in March 2020, repayments are the percentage of student loan borrowers in scheduled to resume in May 2022. There are several default was nearly three times as high in Bay repayment options for federal student loans— Area neighborhoods in the lowest income quintile including four income-driven repayment plans in (15 percent) compared to those in the highest which a borrower’s monthly payment is capped income quintile (5.6 percent). The study further at a certain percentage (between 10 percent and found that default rates were considerably higher in 20 percent) of their discretionary income, and any Bay Area neighborhoods with higher percentages loan balance that remains after a set repayment of Black and Hispanic residents. period (between 20 and 25 years) is forgiven. Borrowers Unable to Repay Loans Risk Going Into Default. If a borrower does not make Figure 6 payments for a certain time period (typically nine Default Rate Varies by Segment months for federal student loans), the loan goes into Estimated Three-Year Default Rate for default. Borrowers who default on their loans can 2017-18 Cohorta face various consequences, including collection fees, wage garnishing, reduced credit scores, and Segment Default Rate loss of access to additional student financial aid. California Community Colleges 13% The U.S. Department of Education reports that Private for-profit 9 7.3 percent of borrowers nationally who entered California State University 3 repayment on their federal student loans in 2017-18 Private nonprofit 3 University of California 2 defaulted within three years. (This rate may be State Total 6% artificially low, as the three-year window includes a Percent of borrowers entering repayment on federal loans during six months during which repayments were paused federal fiscal year 2017-18 who defaulted by September 30, 2020. under the pandemic. The three-year default rate Reflects LAO estimates based on the U.S. Department of Education’s Official Cohort Default Rates for Schools. for the 2016-17 cohort was 9.7 percent.) The default rate in California is somewhat lower than the national average. Based on U.S. Department www.lao.ca.gov 13 2022-23 BUDGET DFPI Regulates Student Loan Servicers and how to identify and report concerns with loan Receives Borrower Complaints. Broadly, DFPI servicers. Potential activities include creating a provides consumer protection and oversight of statewide communications campaign, launching financial service providers. As part of this work, a new website, partnering with community-based DFPI regulates student loan servicers—the organizations and legal aid groups, and managing companies the federal government assigns to incoming consumer complaints. The administration manage billing and payments on student loans. indicates this proposal is still under development Recently, Chapter 154 of 2020 (AB 376, Stone) and further details will be released in the spring also created a student loan ombudsman under (likely at the May Revision). At this time, there is no DFPI. The ombudsman’s duties include receiving budget change proposal, budget bill language, or and reviewing complaints from student loan trailer bill language for the proposal. borrowers, providing information to the public Issues to Consider regarding borrowers’ concerns, and monitoring the development of relevant federal and state policies, Several Key Issues for Legislature to among other activities. Consider in Assessing Proposal. If it receives the full proposal from the administration this spring, Students Also Receive Information on we encourage the Legislature to consider the Borrowing From Various Other Sources. following issues: The U.S. Department of Education provides mandatory entry and exit counseling to all federal • Would the Proposal Complement Existing student loan borrowers. These online sessions Resources? There are many existing provide information on student budgets, loan sources of information on student loans and terms, repayment, and default. Many colleges and repayment. A promising proposal would universities also offer financial literacy services identify and address gaps in these existing that cover student loans, among other topics. resources rather than duplicating them. In addition, the state provides funding to the Bureau • Would the Proposed Activities Be of Private Postsecondary Education (through the Well-Targeted? Given that student loan Office of Student Assistance and Relief) to offer default rates are disproportionately high outreach on student loans and other topics to among certain groups of borrowers, the prospective, current, and former students of private Legislature may wish to prioritize funding colleges and universities. for activities designed to reach these borrowers who tend to face greater challenges Proposal with repayment. Governor Proposes Outreach Initiative to • Are the Proposed Activities Appropriate Assist Student Loan Borrowers. The Governor’s for One-Time Funding? Some of the budget provides $10 million one-time General potential activities included in this proposal Fund to DFPI for outreach and education to reflect one-time expenses, such as creating student loan borrowers. Based on a one-page communications materials or launching a description provided by the administration, the website. Other activities, such as managing proposal is intended to help borrowers understand consumer complaints, would likely require their loan and repayment options, as well as ongoing funding to be sustained. 14 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET www.lao.ca.gov 15 2022-23 BUDGET LAO PUBLICATIONS This report was prepared by Lisa Qing, and reviewed by Jennifer Pacella and Anthony Simbol. 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, California 95814. 16 LEGISLATIVE ANALYST’S OFFICE