The 2026-27 Budget: California Student Aid Commission

analysis full 2026-27 BUDGET The 2026-27 Budget: California Student Aid Commission GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2026 SUMMARY Brief Covers the California Student Aid Commission (CSAC). This brief provides an update on cost estimates for the Cal Grant program and analyzes the Governor’s budget proposal for the Middle Class Scholarship (MCS) program. Cal Grant and MCS Costs Have Increased Over the Past Decade. Since 2015-16, spending has increased by more than $600 million for the Cal Grant program and by more than $950 million for the MCS program. We analyze the underlying drivers of this higher spending. For the Cal Grant program, much of the increase is attributable to several policy changes the state made over the past decade, together with tuition increases that the two public university systems have implemented. (Cal Grants cover full tuition at in-state public universities.) These changes have resulted both in larger Cal Grant award amounts and more students being eligible for Cal Grant awards. Similarly, the state revamped the MCS program in 2022-23, which generally increased award amounts and expanded program eligibility. The eligibility changes resulted in a seven-fold increase in the number of MCS recipients. Cal Grant Spending Continues to Increase Under Governor’s Budget. The Governor’s budget revises 2025-26 Cal Grant spending upward by $107 million (3.8 percent) relative to the enacted level. From the revised 2025-26 level, the Governor’s budget increases Cal Grant spending by $337 million (12 percent), bringing total program spending to $3.2 billion in 2026-27. Though the Governor does not propose any further Cal Grant expansions, tuition increases at the public universities continue to raise Cal Grant costs. CSAC also assumes that the number of recipients will continue to increase in 2026-27, particularly in the California Community College (CCC) Expanded Entitlement and High School Entitlement programs. Governor’s Budget Proposes a Reduction in MCS Award Coverage. MCS awards reflect a certain percentage of students’ remaining cost of attendance after accounting for their available resources (including any gift aid they receive). MCS awards cover 35 percent of a student’s remaining cost of attendance in 2025-26. In 2026-27, the Governor proposes reducing award coverage to 17.5 percent. The administration estimates that this would reduce program spending from $1.1 billion in 2025-26 to $513 million in 2026-27 (a $541 million reduction in spending). Last year, the state adopted a new budgetary approach for the MCS program. Under the new budgetary approach, the state began funding the MCS program one year in arrears. As a result, the state would not achieve the identified General Fund savings until 2027-28. Recommend Legislature Consider Adopting Proposal to Reduce MCS Award Coverage. Given projected out-year budget deficits, the Legislature likely will have to consider budget-balancing proposals over the next couple of years. The Governor, however, has only one proposed budget solution in all of higher education that would help balance the budget in 2027-28. Beyond facing a deficit, the MCS program has certain drawbacks. It has significant overlap with the Cal Grant program, but is less targeted to lower-income students, while being more complex to convey and administer than other financial aid programs. For all these reasons, reducing MCS award coverage could be among the least disruptive choices the Legislature faces. Consider Funding Program Using More Standard Budget Practice. The new budgetary approach of paying for MCS one year in arrears creates a debt obligation for the state. We recommend the Legislature give high priority to retiring this debt once one-time funding becomes available. The state could still set MCS award coverage in advance to provide greater clarity for campuses and students. However, rather than funding the program one year in arrears, the state could budget based on an estimate of MCS program costs for the coming fiscal year. It could then allow CSAC to access a small loan towards the end of the fiscal year if the budget appropriation falls short of covering program costs and then true up the actual cost the following year. This is how the state budgets for the Cal Grant program. www.lao.ca.gov 1 analysis full 2026-27 BUDGET INTRODUCTION Brief Focuses on CSAC Budget. CSAC is two largest programs. The first section focuses on the primary state agency that administers student the Cal Grant program whereas the second section financial aid programs. This brief analyzes the focuses on the MCS program. Our CSAC Budget and Governor’s 2026-27 budget proposals for CSAC. Changes in CSAC General Fund Spending tables The brief contains two sections covering CSAC’s provide more detail on CSAC’s budget. CAL GRANTS In this section, we first provide background on Cal Grants Have Financial and Academic the Cal Grant program and discuss trends over the Eligibility Criteria. Students apply for Cal Grant past decade. We then discuss the Governor’s cost awards by submitting a Free Application for estimates for the program in the current year and the Federal Student Aid (FAFSA) or, in certain cases, budget year. a California Dream Act Application (CADAA). Background Figure 1 Cal Grant Program Is the State’s Cal Grant Amounts Vary by Award Type, Longest-Standing and Largest Financial Aid Sector, and Student Characteristics Program. The state created the Cal Grant program Maximum Annual Award for a New, Full-Time to increase college access by making college more Undergraduate Student, 2026-27 affordable for California students with financial need. The program gives these students choice in Tuition Awards where they attend school, as students can use their Cal Grant A and B Cal Grant award at any of the state’s three public UC $15,588 segments, private nonprofit institutions, and private Nonprofit institutions 9,358 WASC-accredited for-profit institutions 8,056 for-profit institutions. The program began in 1956 with CSU 6,838 600 students receiving awards to assist with the cost Other for-profit institutions 4,000 of college. In 2024-25, the program served more than Cal Grant C 450,000 students and spent $2.5 billion. Private institutions $2,462 Grant Amounts Vary by Award Type and Access Awardsa Segment. As Figure 1 shows, there are three types Cal Grant A Students with dependent children $6,000 of Cal Grant awards (Cal Grant A, B, and C) that cover Foster youth 6,000 certain kinds of college costs. Cal Grant A awards Cal Grant B cover full systemwide tuition and fees at public Students with dependent children $6,000 universities and a fixed amount of tuition at private Foster youth 6,000 universities. Cal Grant B awards provide the same Other students 1,648 amount of tuition coverage as Cal Grant A awards in Cal Grant C most cases, while also providing an “access award” Students with dependent children $4,000 for nontuition costs such as food and housing. Cal Foster youth 4,000 Other CCC students 1,094 Grant C awards, which are only available to students Private institution students 547 enrolled in career technical education programs, a Access awards generally may cover any living cost, including housing, provide lower amounts of tuition and nontuition food, transportation, books, and supplies. Cal Grant C awards for students attending private institutions may cover only books, supplies, coverage. Across all award types, larger amounts of and equipment. Students attending private for-profit institutions are nontuition coverage are available to students with ineligible for “students with dependent children” and “foster youth” awards. dependent children as well as current and former WASC = Western Association of Schools and Colleges. foster youth. (The Cal Grant Award Coverage table provides more detail.) 2 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET To qualify for an award, students must demonstrate Trends “financial need,” which, for most students, is Number of Cal Grant Recipients and determined through a federal calculation using Spending Have Been Rising. As Figure 2 on information submitted on the FAFSA. (This financial the next page shows, the number of Cal Grant need calculation is used for many needs-based recipients and Cal Grant spending have increased financial aid programs across the country.) over the past decade. The number of recipients Students have financial need if their total cost of grew from approximately 328,000 in 2015-16 attendance exceeds their Student Aid Index, which to 453,000 in 2024-25—a 3.7 percent average is a proxy for what households can contribute annual increase. Spending grew from $1.9 billion toward college costs. In addition, students must to $2.5 billion over the same period—a 3.1 percent have household income and assets below specified average annual increase. Growth in both recipients Cal Grant caps. The state uses these caps both to and spending were particularly high in 2024-25 target aid and contain program costs. The income (the most recent year of actual data). In 2024-25, and asset caps vary by family size and are adjusted Cal Grant recipients increased by 13 percent and annually for inflation. In the 2025-26 award year, spending increased by 8.7 percent. the annual household income cap for a dependent Notable Policy Changes Have Contributed student from a family of four is $135,900 to qualify to Higher Cal Grant Costs. As Figure 3 on the for Cal Grant A or C awards and $71,500 to qualify next page shows, there have been multiple policy for Cal Grant B awards. Beyond financial criteria, changes to the Cal Grant program over the past students must also meet a minimum grade point decade. These changes have increased both award average (GPA) requirement to qualify for a Cal amounts and number of recipients. In most cases, Grant. The specific GPA requirement varies by the state directly adopted a policy change, but award type. Most award types require a minimum the universities themselves have adopted tuition high school GPA of 2.0 or 3.0 or a minimum increases, which has the effect of increasing community college GPA of 2.0 or 2.4. award amounts. In the rest of this section, we look Most Cal Grants Are Entitlements, but Some at what changes the state and universities have Are Awarded Competitively. In 2001-02, the made that are contributing to rising Cal Grant state began guaranteeing Cal Grants to recent costs. Understanding these underlying factors is high school graduates as well as transfer students important for budget makers, especially as the under age 28 who met the financial and academic state faces projected deficits and a structural criteria. In 2021-22, the state began guaranteeing budget imbalance. This information could help Cal Grants to community college students the Legislature this year or in future years as it regardless of their time out of high school or age. In contemplates how to accommodate growing 2024-25, the state provided a total of approximately Cal Grant costs amidst its other budget priorities. 425,000 Cal Grant entitlement awards (consisting of Tuition Increases at UC and CSU Are 196,000 new awards and 229,000 renewal awards Resulting in Larger Cal Grant Awards. for continuing students). Besides the entitlement One reason Cal Grant spending is higher is awards, the state has a small number of competitive because students are receiving larger Cal Grant Cal Grant awards for students who do not qualify awards. Larger awards are due in part to the tuition for entitlement awards—typically older students increases the University of California (UC) and who enroll directly at four-year universities. This California State University (CSU) have adopted, program provides a fixed number of new awards which translate directly into higher Cal Grant tuition (13,000 annually). CSAC uses a scoring system to awards. Both UC and CSU raised tuition for all select students for competitive awards. A student’s undergraduates in 2017-18. Both UC and CSU score is based on multiple factors, including GPA, also have taken action more recently to implement household income and size, parental education, tuition increases. At UC, a new multiyear tuition and family/environmental indicators (such as policy first took effect in 2022-23, then was revised students experiencing homelessness). and extended through 2032-33. Under both the www.lao.ca.gov 3 analysis full 2026-27 BUDGET Figure 2 Cal Grant Recipients and Spending Grew More Quickly in 2024-25 Than Previous Years (Dollars in Millions) $3,000 500,000 450,000 2,500 Recipients 400,000 Spending 350,000 2,000 300,000 1,500 250,000 200,000 1,000 150,000 100,000 500 50,000 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 Figure 3 Several Policy Changes Are Impacting Cal Grant Costs State Actions University Actions State creates Cal Grant A Cal Grant A and B access award for State creates tuition awards students with Cal Grant A UC adopts CSU adopts increase at UC and dependent children. access award multiyear policy multiyear policy to CSU due to tuition for foster youth. to increase increase tuition increases. Cal Grant B and C tuition annually. annually. access award Cal Grant B and C Cal Grant A and B Cal Grant A and B Cal Grant C access increases for students access award tuition awards tuition awards award increases for with dependent increases begin increasing begin increasing in CCC students. children. for foster youth. in tandem. tandem. 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 State creates State requires Policy changes shaded in gray impacted the number of Cal Grant public high Cal Grant recipients. All other policy changes impacted Community College schools to have Cal Grant award amounts. Expanded Entitlement seniors complete program. FAFSA or CADAA (or opt out).ª ª This policy change was adopted in 2021 and first applied to high school seniors graduating in spring 2023. The impact on Cal Grant costs began in 2023-24. FAFSA = Free Application for Federal Student Aid and CADAA = California Dream Act Application. 4 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET original and revised UC tuition policies, tuition Cal Grant Eligibility Increased Substantially charges increase annually for new undergraduates With Creation of CCC Expanded Entitlement (while staying flat for continuing undergraduates Program. Beyond Cal Grant awards becoming for up to six years). Annual increases are tied larger, Cal Grant spending also has increased to a three-year rolling average of the California due to more recipients. Some of the growth in Consumer Price Index and capped at 5 percent. recipients is due to the state creating the CCC The CSU Board of Trustees also recently adopted a Expanded Entitlement program in 2021-22. Prior to multiyear tuition policy. Under CSU’s policy, tuition this program, students were eligible for a Cal Grant charges increase 6 percent annually for all students entitlement award if they had just graduated high beginning in 2024-25 and extending through school or were one year out of high school (under 2028-29. We estimate that larger Cal Grant awards the High School Entitlement program). These from UC and CSU tuition increases account for students could use their award at CCC, UC, CSU, roughly one-quarter of the growth in Cal Grant costs or private institutions. Students who were a few between 2015-16 and 2024-25. years out of high school and under age 28 were State Also Increased and Expanded Access also eligible for a Cal Grant entitlement award Awards for Student Parents. In 2019-20, the state once they transferred from CCC to UC, CSU, or increased the access award amount for students private institutions (under the Transfer Entitlement with dependent children from $1,648 to $6,000 for program). All students age 28 or older were Cal Grant B awards and from $1,094 to $4,000 for ineligible for Cal Grant entitlement awards, though Cal Grant C awards. Additionally, that same year, they could apply for a fixed number of competitive the state created the Cal Grant A access award awards. The CCC Expanded Entitlement program for students with dependent children. This allowed expanded Cal Grant eligibility by (1) allowing student parents receiving a Cal Grant A tuition students to receive a Cal Grant entitlement award award to also qualify for an access award of $6,000. at CCC regardless of how many years they had (Originally, these larger access awards were only been out of high school and (2) allowing students available to students at UC, CSU, and CCC but of any age to keep their Cal Grant entitlement were extended to students at private nonprofit award upon transferring from CCC to UC or CSU. institutions in 2022-23.) In 2024-25, approximately These two eligibility expansions have resulted in a 34,000 students with dependent children received considerable increase in Cal Grant recipients. access awards (with 3,177 students receiving Cal CCC Expanded Entitlement Program Is Large Grant A awards, 28,433 students receiving Cal Contributor to Higher Cal Grant Spending. Grant B awards, and 2,437 students receiving Cal In 2024-25, an estimated approximately 157,000 Grant C awards). In the same year, the state spent students are receiving Cal Grant awards under the $108 million on the new Cal Grant A access awards CCC Expanded Entitlement program, accounting and higher Cal Grant B and C access awards for for 35 percent of all Cal Grant recipients that students with dependent children. year. Since the program’s inception, associated Similarly, State Increased Access Awards costs have increased considerably each year— for Foster Youth. As with the access awards for rising from $82 million in 2021-22 to $335 million students with dependent children, in 2021-22, in 2024-25. The continuing annual growth in the state increased the access awards for current program spending is likely due to it not yet having and former foster youth students from $1,648 to reached full implementation, as the number of $6,000 for Cal Grant B awards and from $1,094 program recipients transferring their awards to to $4,000 for Cal Grant C awards. The state also UC and CSU is continuing to increase. Of the made foster youth eligible for the Cal Grant A access $335 million in spending in 2024-25, we estimate award of $6,000. (While originally available only to that about half would have occurred under the foster youth at UC, CSU, and CCC, these awards Transfer Entitlement and Competitive programs. were extended to foster youth at private nonprofit The remainder, however, would not have occurred institutions in 2022-23.) In 2024-25, approximately absent the policy change. 4,000 foster youth students received a Cal Grant access award with an associated cost of $14 million. www.lao.ca.gov 5 analysis full 2026-27 BUDGET FAFSA Requirement for California High cost estimates. Since budget enactment, spending School Seniors Also Is Likely Impacting Cal is coming in higher than budgeted in all program Grant Costs. Starting with the 2023-24 financial areas (except for competitive awards), with the aid cycle (spring 2023 high school graduates), largest increases in the High School Entitlement the state required local educational agencies and CCC Expanded Entitlement programs. to confirm all graduating high school seniors Higher spending in the High School Entitlement complete and submit the FAFSA or CADAA (or program is due to an 8.1 percent increase in the opt out). According to a PPIC report, during the expected number of recipients. For the CCC 2023-24 financial aid cycle, the number of FAFSA Expanded Entitlement program, higher spending and CADAA applications submitted by high school is particularly concentrated at CSU (due to more graduates increased by 16 percent for the UC/CSU recipients transferring to CSU and their average deadline (March 2, 2023) and by 11 percent for the awards increasing). CCC deadline (September 2, 2023). Additionally, Governor’s Budget Reflects Further the report found that the largest increase in Spending Increases in 2026-27. The Governor applications was from the state’s lowest-income does not propose any further Cal Grant policy students. Unlike the CCC Expanded Entitlement expansions, but the proposed budget covers Program, this policy change did not make more higher anticipated Cal Grant costs in 2026-27. students eligible for Cal Grants. However, the Specifically, the Governor’s budget provides a increase in high school students completing $337 million (12 percent) ongoing General Fund the FAFSA and CADAA, especially those from augmentation (over the revised 2025-26 spending low-income families, likely is still increasing the level). Figure 4 summarizes the projected changes number of Cal Grant recipients and spending. for 2026-27 by segment and award type. The higher This is because eligible Cal Grant students who spending reflects a 9.1 percent projected increase may not have previously applied for financial in recipients and a 2.3 percent projected increase in aid are now applying. The number of recipients average Cal Grant award amounts, primarily due to for Cal Grant High School Entitlement awards UC’s and CSU’s planned tuition increases. (Under increased by 1.3 percent in 2023-24 and by CSAC’s estimates, $65 million of the Cal Grant 5.6 percent in 2024-25. spending increase in 2026-27 is attributable to Bulk of Cal Grant Growth Over the Past covering higher tuition costs at UC and CSU.) Decade Is Attributable to Policy Changes. From Cost Estimates Will Be Updated at May 2015-16 to 2024-25, Cal Grant spending increased Revision. CSAC prepared the Cal Grant cost by $636 million. We estimate roughly half of this estimates underlying the Governor’s budget in growth is due to larger Cal Grant award amounts, October 2025. In the spring, CSAC plans to update including the tuition increases at UC and CSU and its estimates based on more recent program data changes relating to access awards for students for the 2025-26 award cycle. The administration is with dependent children and foster youth. We expected to update its Cal Grant spending levels at estimate that about one-quarter of this growth is the May Revision accordingly. Given the projected attributable to more students being eligible for a Cal out-year deficits, covering existing Cal Grant costs Grant award under the CCC Expanded Entitlement could be challenging even if estimates come in program. The remainder of the increase in spending lower in May. As a result, the state will likely not is primarily driven by underlying Cal Grant caseload have the capacity for further program expansion growth at UC and CSU. over the next few years. Governor’s Budget Cost Estimates Current-Year Cal Grant Spending Revised Upward. The Governor’s budget adjusts 2025-26 Cal Grant spending upward by $107 million (3.8 percent) to align with CSAC’s most recent 6 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Figure 4 Cal Grant Spending Is Estimated to Be Up 12 Percent in 2026-27 Reflects Cost Estimates in Governor’s Budget (Dollars in Millions) Change From 2025-26 2024-25 2025-26 2026-27 Actual Revised Proposed Amount Percent Totals $2,496 $2,898 $3,235 $337 11.6% By Segment: California Community Colleges $1,082 $1,232 $1,365 $133 10.8% California State University 844 1,026 1,188 161 15.7 University of California 315 362 388 26 7.3 Private nonprofit institutions 228 247 261 14 5.8 Private for-profit institutions 25 30 33 2 7.3 Other public institutions 1 1 —a —a -63.7 By Program: High School Entitlement $1,762 $2,044 $2,317 $273 13.4% CCC Expanded Entitlement 426 515 562 46 9.0 Competitive 148 150 155 5 3.2 Transfer Entitlement 145 167 180 12 7.4 Cal Grant C 16 21 22 1 4.6 By Award Type: Cal Grant B $1,170 $1,379 $1,558 $179 13.0% Cal Grant A 1,310 1,498 1,656 157 10.5 Cal Grant C 16 21 22 1 4.6 By Renewal or New: Renewal $1,662 $1,940 $2,219 $279 14.4% New 834 958 1,016 58 6.1 a Less than $500,000. Notes: Data reflect California Student Aid Commission estimates. MIDDLE CLASS SCHOLARSHIPS In this section, we first provide background on assistance under the Cal Grant program. First the MCS program and discuss program trends. We implemented in 2014-15, students with household then describe the Governor’s proposal for 2026-27 incomes of up to $100,000 could have 40 percent awards, assess the proposal, and provide two of their tuition covered (when combined with all associated recommendations. other public financial aid). Tuition coverage was graduated downward as household income rose, Background with students receiving 10 percent tuition coverage Original MCS Program Covered Partial at $150,000. Tuition Costs for Higher-Income Students. Original MCS Program Did Not Require During the Great Recession, UC and CSU notably Students to Demonstrate Financial Need. raised tuition, partly in response to declines in Whereas most federal and state financial aid state funding. Cal Grants generally covered these programs require undergraduates to demonstrate tuition increases for students from low- and financial need, the original MCS program did not. middle-income households. In 2013, the Legislature To be eligible for MCS awards, students only had to created the original MCS program to provide partial have household income and assets under specified tuition coverage for higher-income UC and CSU program caps. These income and asset caps were students who generally did not qualify for tuition adjusted annually for inflation. They did not vary www.lao.ca.gov 7 analysis full 2026-27 BUDGET by family size. State law capped spending for the This parent contribution is one-third of the expected original MCS program at $117 million annually and parent contribution calculated according to the directed CSAC to prorate award amounts to remain federal student aid index methodology. After under the cap, if needed. making all of these deductions, this formula derives Revamped MCS Program Retained a Few Key the student’s remaining costs. (Page 19 of this Aspects of Original Program. In 2021, the state CSAC MCS 2024-25 handbook shows illustrative adopted legislation revamping the MCS program, MCS award amounts for students at different with implementation beginning in the 2022-23 segments with different levels of financial means.) academic year. Under the revamped program, MCS Award Coverage Has Been Determined students still do not have to demonstrate financial in Two Ways. Under the revamped program, need. Moreover, students still are subject to the every student receives the same percentage original income and asset cap rules. In 2025-26, the of their remaining costs covered (except foster maximum annual household income for dependent youth, who receive awards that cover 100 percent students to qualify for an MCS award is $234,000. of their remaining costs). From 2022-23 through This income level equates to roughly the top 90th 2024-25, CSAC determined what percentage of percentile of households in California (meaning each student’s remaining costs to cover based only about one in ten households makes above on the annual MCS appropriation. In 2022-23, that level). Lastly, under the revamped program, award coverage was 26 percent, followed by students at private universities remain ineligible for 36 percent in 2023-24, and 35 percent in 2024-25. MCS awards. Using this approach, CSAC could not finalize the Revamped MCS Program Contains Two Key percentage of award coverage until August when Policy Changes. One major change was shifting it received enrollment rosters from campuses. This from focusing only on tuition coverage to focusing issue made it challenging for campuses to inform on a student’s total cost of attendance. Under the students of their estimated MCS award amounts revamped program, students may use their MCS prior to the start of the academic year. As a result, awards for tuition or nontuition expenses, such as students often did not know their full financial aid housing and food. A second major change was package prior to the start of the academic year. expanding eligibility to students receiving Cal Grant To help mitigate this issue, in 2025-26, rather than awards. For Cal Grant recipients (who already have setting the appropriation for MCS and adjusting their tuition, and, in some cases, a portion of their award coverage accordingly, the state locked nontuition costs covered), MCS provides additional in the percentage of award coverage that year aid for nontuition costs. Though less notable given at 35 percent. The state is now responsible for relative magnitude, the revamped program also covering whatever is the associated cost. expanded eligibility to CCC students in bachelor’s Last Year, State Began Funding Program in degree programs. Arrears. The state also adopted a new budgetary Revamped MCS Award Calculation Is More approach for the MCS program last year. Under the Complex. Calculating each student’s award new budgetary approach, the state began funding amount involves several steps. Starting with a the MCS program one year in arrears. As a result, student’s total cost of attendance, CSAC deducts the state will pay for the cost of MCS awards for the student’s available resources, consisting of the 2025-26 academic year in 2026-27. The state other need-based and non-need-based gift aid. is covering costs in 2025-26 using a General The formula also deducts a student contribution Fund loan. from part-time work earnings. Specifically, the Trends MCS calculation assumes a student works MCS Recipients and Costs Increased 15 hours per week, 39 weeks per year, at the Substantially Under Revamped Program. As state minimum wage rate, as adjusted annually. Figure 5 shows, the revamped program resulted in For dependent students with household a sharp increase in the number of MCS recipients incomes of more than $100,000, the MCS and the amount of spending. For the eight years calculation also deducts a parent contribution. 8 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Figure 5 Spending and Recipients Have Increased Significantly Under Revamped MCS Program (Dollars in Millions) $1,200 400,000 350,000 1,000 300,000 800 250,000 600 200,000 150,000 400 100,000 Recipients 200 50,000 Spending 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 Note: The shaded region represents the revamped MCS program. MCS = Middle Class Scholarships. in which the state implemented the original MCS due to expanded eligibility, some is due to higher program, the program gave awards to an average enrollment at UC and CSU. Specifically, from of about 56,000 recipients each year. The state 2021-22 (the year before MCS was revamped) appropriated approximately $100 million annually to 2024-25, resident undergraduate enrollment over this period. In 2024-25 (three years into the increased by 7.5 percent and 2.1 percent at UC and revamped program), the program gave awards to CSU, respectively. more than 350,000 recipients—about a seven-fold Average MCS Award Amount Increased by increase. In 2024-25, the state provided $1 billion About Half Between Original and Revamped General Fund for the MCS program—reflecting Program. Across all MCS recipients, the average about a ten-fold increase. MCS award in 2024-25 was $3,673—50 percent Increase in MCS Spending Stems Primarily higher than in 2021-22. In 2024-25, the average From Expanding Eligibility to Cal Grant MCS award for CSU students was 70 percent Recipients. In 2024-25, about 190,000 (55 percent) higher than it had been under the original program. MCS recipients were also Cal Grant recipients By comparison, the average MCS award for UC (that is, students who were not eligible for awards students was slightly lower than under the original under the original program). These recipients program. These changes in average award amounts account for roughly 80 percent of the increase in are due to switching the program from partial MCS spending. Though much of the increase in tuition coverage to a share of remaining cost MCS recipients under the revamped program is of attendance. www.lao.ca.gov 9 analysis full 2026-27 BUDGET Proposal year in arrears. Given this budgetary approach, the state would not achieve the identified one-time Governor Proposes Reducing Award General Fund savings until 2027-28. Coverage to 17.5 Percent in 2026-27. The Governor’s budget reduces MCS award coverage Assessment by half—from 35 percent to 17.5 percent—for the Impact of Reducing Award Coverage Would 2026-27 award year. This is the only proposed Vary Among Students. At the proposed award higher education budget solution. The solution coverage of 17.5 percent, the average MCS award does not come with any associated new out-year amount is expected to decrease by about half. obligations (unlike certain other solutions that Our office estimates the average award in 2026-27 effectively push out costs). The proposed funding would be $1,432 at CSU, $1,586 at UC, and $2,198 level is $513 million ongoing General Fund. The at CCC. Estimating the impact of lower MCS awards reduction in award coverage would decrease MCS is difficult given the specific impact will depend on spending by $541 million, resulting in a like amount each student’s unique financial situation. On the of General Fund savings. The administration scores one hand, students with higher MCS awards may the $541 million as one-time savings. (For the past be more sensitive to the reduction than students three years, the state has supported the program with smaller MCS awards. On the other hand, as using a mix of ongoing and one-time General Figure 6 shows, students with higher awards are Fund.) The Governor’s budget maintains the new likely to be from households with higher incomes. budgetary approach of funding MCS awards one Figure 6 MCS Program Serves Fewer High-Income Students but at Higher Award Amounts 2023-24 80,000 $5,000 Number of Recipients 4,500 70,000 Average Award Amount 4,000 60,000 3,500 50,000 3,000 40,000 2,500 2,000 30,000 1,500 20,000 1,000 10,000 500 $0 or Less $1 $25,001 $50,001 $75,001 $100,001 $125,001 $150,001 $175,001 $200,001 to to to to to to to to to 25,000 50,000 75,000 100,000 125,000 150,000 175,000 200,000 217,000 Household Income Note: 2023-24 is the most recent data available on MCS recipients by income bracket. MCS = Middle Class Scholarship. 10 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET These students tend to receive less gift aid, Program Is More Challenging to Convey and resulting in larger MCS awards than students from Administer Than Other State Aid Programs. lower-income households. Higher-income students Unlike other state financial aid programs, MCS may be less affected by a reduction to their MCS is not a set award amount. Additionally, as a awards because they have more financial resources “last-dollar-in” program, the award amount is to substitute the loss in award amount. Though the subject to variability as long as any component impact of the award reduction will be felt differently of the formula still could potentially change. among students, students might work a couple This makes it challenging for students and families more hours per week or take out larger loans to to plan ahead, as they will likely not know the compensate for smaller MCS awards. award amount prior to the start of the academic Program Has Considerable Overlap With Cal year. As a result, the impact of the program on a Grant Program. When MCS was originally created, student’s decision to attend college may be limited. it was targeted to help moderate-income students The complex and multicomponent nature of the who did not receive Cal Grants cover tuition costs. MCS formula also makes it more cumbersome Thus, the original MCS program was intended for campuses to administer than other financial to have little, if any, overlap with the Cal Grant aid programs. program. When the MCS program was revamped Funding Program in Arrears Could Put State in 2022-23 and eligibility was extended to Cal in Challenging Budget Situation. Under the new Grant recipients, program overlap became notable. budgetary approach for the program, the state is In 2024-25, 55 percent of MCS recipients also providing MCS awards to students in one year but received a Cal Grant award. This creates multiple paying for those awards a year later. To do so, the inefficiencies. It leads to higher administrative costs state is using a General Fund cash loan to cover for the state as it is administering two financial the payments to students. This approach only aid programs that are serving much of the same works if the state is in a strong cash position. If the population. Similarly, campuses must administer state’s cash position weakens, which has happened two programs and issue two different awards to during previous fiscal downturns, the state could many of the same students. Lastly, students receive find that internal borrowing is no longer an option. two different awards for largely the same purpose In this situation, the state might decide to turn to (and they might not understand the distinction external borrowing. Such borrowing would come between the awards). As the Legislature prepares with interest, resulting in higher program costs at a for potential out-year deficits, it likely will want time when the state has fewer budgetary resources. to begin identifying where efficiencies can be In turn, the impact on the rest of the budget would achieved and duplicative or overlapping programs be exacerbated. Paying for awards in the year the can be streamlined. costs are incurred would mitigate this situation, as MCS Does Not Target Aid Based on Financial the state would not have to rely on borrowing to Need. Requiring financial need criteria to be met cover annual program costs. has long been used by governments to target Recommendations assistance to those most likely to benefit from it. Consider Adopting Proposal to Reduce In contrast, MCS does not have a financial need MCS Award Amounts Given Projected Budget eligibility component, and its income and asset Deficits. Both our office and the administration thresholds are much higher than those the Cal are projecting notable out-year budget deficits. Grant program uses. As a result, the program is less The Governor’s budget, however, has only one targeted to lower-income students. Lower-income proposed budget solution in the higher education students, however, are the ones least likely to area addressing these deficits. Given the state’s be able to attend and complete college without fiscal outlook, the Legislature likely will need to financial support. consider not only this MCS proposal but many other budget-balancing proposals over the next couple www.lao.ca.gov 11 analysis full 2026-27 BUDGET of years. Given the MCS program has significant the way it pays for other state programs—in the overlap with the Cal Grant program, is less targeted year in which the costs are generated. Even funding to lower-income students, and is more complex MCS in the traditional way, the state could still set to convey and administer than other financial the award coverage percentage for each award aid programs, reducing MCS award coverage year. Setting award coverage would provide greater could be among the least disruptive choices the clarity to campuses and students. As it does with Legislature faces. other state programs, the state could budget Consider Funding Program Using More based on an estimate of MCS program costs for Standard Budget Practice. Paying for MCS the coming fiscal year. It could then allow CSAC costs one year in arrears effectively creates a to access a small loan towards the end of the debt obligation for the state. Once one-time fiscal year if the budget appropriation falls short of funding becomes available, we recommend the covering program costs. The state could then true Legislature give high priority to retiring this debt. up the actual cost the following year. This would be We recommend the state return to paying for MCS similar to how the Cal Grant program is funded. LAO PUBLICATIONS This report was prepared by Natalie Gonzalez, and reviewed by Jennifer Pacella and Ross Brown. 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. 12 LEGISLATIVE ANALYST’S OFFICE