BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1637
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          Date of Hearing:   April 17, 2012

                       ASSEMBLY COMMITTEE ON HIGHER EDUCATION
                                 Marty Block, Chair
                  AB 1637 (Wieckowski) - As Amended:  March 7, 2012
           
          SUBJECT  :   Cal Grant Program: student default risk index score.

           SUMMARY  :  Establishes the student default risk index (risk 
          index) and limits institutional participation in the Cal Grant 
          Program based on risk index scores.  Specifically,  this bill  :  

          1)Requires an institution participating in the Cal Grant Program 
            to calculate and certify its risk index to the California 
            Student Aid Commission (CSAC) by October 1st annually.

          2)Requires the risk index to be calculated by multiplying the 
            percentage of undergraduate federal student loan borrowers at 
            the institution, as reported to the United States Department 
            of Education (USDE) for the academic year two years prior to 
            the year of the risk index calculation, by the institution's 
            three-year cohort default rate, as reported by the USDE in the 
            annual release of cohort default rates in the same year as 
            certification.   

          3)Specifies that for the 2013-14 academic year CSAC shall 
            determine the risk index for each qualifying institution using 
            the three-year cohort default rate, federal student loan 
            borrower data, and student enrollment data provided by USDE 
            for the 2009 fiscal year.  Provides that for each year 
            thereafter, institutions shall use the official three-year 
            cohort default rate to calculate the risk index.

          4)Requires, beginning with academic year 2013-14, institutions 
            participating in the Cal Grant Program to have a risk index of 
            less than 15.

          5)Provides that an institution that becomes ineligible under the 
            risk index requirements may regain eligibility in subsequent 
            academic years upon certification to CSAC that the risk index 
            threshold has been met.
           
          EXISTING LAW  establishes the Cal Grant Program, administered by 
          CSAC, to provide financial aid to eligible students attending 
          qualified institutions.  Generally, accredited institutions with 








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          eligible programmatic offerings are authorized for Cal Grant 
          participation.  Recent legislation (SB 70, Chapter 7, Statutes 
          of 2011) further requires the following:

          1)Student Loan Default:  Institutions with more than 40% of 
            their undergraduate students borrowing federal loans must have 
            a three-year cohort default rate of less than 24.6% to be 
            eligible for new and renewal Cal Grant awards in the 2011-12 
            academic year and less than 30% for each subsequent year. A 
            limited exception allows renewal Cal Grant A and B recipients 
            to continue to use their Cal Grant awards at a newly 
            ineligible institution, but their Cal Grant maximum award 
            amounts are reduced by 20%. 

          2)Data Collection:  As a condition for participation in the Cal 
            Grant Program, institutions are required, beginning in 2012, 
            to annually report to CSAC enrollment, persistence and 
            graduation data for all undergraduate students, including 
            aggregate information on Cal Grant recipients, and the job 
            placement rate and salary and wage information for programs 
            that are designed or advertised to lead to a particular type 
            of job or are advertised with any claim regarding placement. 

          3)Legislative Analyst's Office (LAO) Report:  The LAO is 
            required to report to the Legislature by January 1, 2013, 
            regarding the implementation of SB 70 and include 
            recommendations for appropriate measures of default risk and 
            other direct or indirect measures of quality or effectiveness 
            in institutions participation in the Cal Grant program.   

           FISCAL EFFECT  :  Unknown

           COMMENTS  :   Purpose of this bill  .  According to the author, 
          recent college graduates increasingly find themselves saddled 
          with massive student loan debt they can't afford to pay off.  At 
          the same time, higher education funding (including the Cal Grant 
          Program) is at risk of major budget cuts every year.  The state 
          is spending millions of dollars sending our students to schools 
          that are not serving them well.  This bill is designed to hold 
          schools accountable to minimum standards, limiting the extent to 
          which Cal Grant funding goes to schools where students get into 
          unsupportable debt.  Specifically, this bill provides a 
          refinement on the current cohort default rate calculation by 
          accounting for both the number of students who take out loans 
          and the percentage of students who default on their loans.  








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           Student borrowing  .  Many students rely on loans to finance their 
          education.  Nationally, two-thirds of 4-year undergraduate 
          students graduated with a Bachelor's degree and some debt in 
          2007-08, and the average student loan debt among graduating 
          seniors was $23,186 (including federal loans, state, college and 
          private loans).  The following table reflects 2007-08 national 
          data on the percentage of students borrowing and the average 
          debt per borrower at graduation according to the type of 
          institution and degree program:
           
           -------------------------------------------------------------- 
          |                  Institution Control and                   | |
          |                       Degree Program                       | |
          |                          Percent                           | |
          |                         Borrowing                          | |
          |                          Average                           | |
          |                      Cumulative Debt                       | |
          |                                                            | |
          |Bachelor's Degree                                           | |
          |                                                       65.2%| |
          |                                                     $23,118| |
          |                                                            | |
          |   Public                                                   | |
          |                                                       61.2%| |
          |                                                     $20,040| |
          |                                                            | |
          |   Private Non-Profit                                       | |
          |                                                       70.5%| |
          |                                                     $27,535| |
          |                                                            | |
          |   Private For-Profit                                       | |
          |                                                       96.0%| |
          |                                                     $32,909| |
          |                                                            | |
          |Associate's Degree                                          | |
          |                                                       47.1%| |
          |                                                     $13,289| |
          |                                                            | |
          |   Public                                                   | |
          |                                                       38.9%| |
          |                                                     $10,574| |
          |                                                            | |
          |   Private Non-Profit                                       | |
          |                                                       71.1%| |








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          |                                                     $19,294| |
          |                                                            | |
          |   Private For-Profit                                       | |
          |                                                       97.8%| |
          |                                                     $19,681| |
          |                                                            | |
          |Certificate                                                 | |
          |                                                       63.2%| |
          |                                                     $11,302| |
          |                                                            | |
          |   Public                                                   | |
          |                                                       32.0%| |
          |                                                      $9,754| |
          |                                                            | |
          |   Private Non-Profit                                       | |
          |                                                       49.5%| |
          |                                                     $15,071| |
          |                                                            | |
          |   Private For-Profit                                       | |
          |                                                       89.9%| |
          |                                                     $11,573| |
          |                                                            | |
          |                                                            | |
          |                                                            | |
          |                                                            | |
           -------------------------------------------------------------- 

          According to data provided by The Institute for College Access 
          and Success (TICAS), the percentage of borrowers and average 
          debt amounts for students graduating from California 
          institutions is somewhat comparable to the national figures, 
          with a few notable exceptions.  TICAS indicates that students 
          graduating with associate's and bachelor's degrees from 
          California's public institutions in 2007-08 were about 10% less 
          likely to accumulate student loan debt and the average debt for 
          bachelor's degree students at California's public colleges was 
          about $4,500 less than that of their national counterparts.  
          TICAS data also shows that the average debt for students 
          graduating with bachelor's degrees from California for-profit 
          institutions was $37,923; about $5,000 higher than the national 
          average. 
           
          Student loan defaults  .  The USDE makes student loans widely 
          available with an expectation that upon graduation students will 
          be able to use the education and skills obtained to secure a job 








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          with sufficient earnings to cover loan payments.  Large numbers 
          of graduating students unable to repay their federal loans can 
          signify several problems: students may have dropped out before 
          graduating, the economy may not be supporting jobs in the field, 
          or maybe the degree programs did not adequately train students 
          for employment.  

          A cohort default rate is the percentage of an institution's 
          borrowers that enter repayment status on federal loans during a 
          particular fiscal year, between October 1 and September 30, and 
          default within the cohort default period.  Students are 
          considered to have defaulted after at least 270 days of 
          nonpayment.  The USDE, which calculates and reports cohort 
          default rates, is in the process of moving from a two-year to a 
          three-year cohort default period.  This change is in response to 
          concerns that the two-year window allowed default numbers to be 
          manipulated and did not provide a realistic indication of 
          long-run loan repayment rates.  USDE released preliminary 3-year 
          cohort default rates to the public on December 14, 2009.  The 
          following table summarizes the increase in cohort default rates 
          from two-year to three-year for FY2007 by institution type.  The 
          first official three-year rates are expected to be made public 
          in September 2012.  
                                           
           
           --------------------------------------------------------------- 
          |  Institution  |  2-Year Rate  | 3-Year Trial  |  Percentage   |
          |     Type      |               |     Rate      |   Increase    |
          |---------------+---------------+---------------+---------------|
          |Public         |     5.9%      |     9.7%      |      64%      |
          |---------------+---------------+---------------+---------------|
          |    2-year     |     9.9%      |     16.2%     |      63%      |
          |---------------+---------------+---------------+---------------|
          |    4-year     |     4.4%      |     7.1%      |      64%      |
          |---------------+---------------+---------------+---------------|
          |Private        |     3.8%      |     6.5%      |      71%      |
          |---------------+---------------+---------------+---------------|
          |    2-year     |     8.7%      |     16.2%     |      86%      |
          |---------------+---------------+---------------+---------------|
          |    4-year     |     3.7%      |     6.3%      |      70%      |
          |---------------+---------------+---------------+---------------|
          |Proprietary    |     11.0%     |     21.2%     |93%            |
          |               |               |               |               |
           --------------------------------------------------------------- 









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          Defaulted federal loans have significant consequences for both 
          student borrowers and taxpayers.  For borrowers, defaulting on a 
          federal loan can devastate credit, making it difficult to rent 
          an apartment or buy a car.  Borrowers who default cannot get 
          federal grants or loans to return to school, and the government 
          can garnish wages, seize tax refunds and eventually dock Social 
          Security payments.  For taxpayers, defaulted federal loans cost 
          money.  It is estimated that the total defaulted loans 
          outstanding are around $40 billion, when accrued but unpaid 
          interest and late fees are included in addition to loan 
          principal.  Because of the risk to both students and taxpayers 
          for defaulted loans, the USDE uses cohort default rate related 
          sanctions and benefits as an incentive for institutions to work 
          with their borrowers to reduce defaults and prevent institutions 
          with high default rates from participating in federal financial 
          aid programs.
            
           Accounting for student population differences  .  Proponents of 
          this bill argue that evaluating both the percentage of borrowers 
          and the percentage of defaults provides a more nuanced metric by 
          which to judge the performance of institutions.  Opponents, 
          generally for-profit colleges, argue that high percentages of 
          borrowers and defaults results from serving at-risk populations. 
           There appears to be some evidence that risk factors that affect 
          persistence and attainment account for some of the difference in 
          default rates between types of colleges.  According to research 
          by Finaid.org, 60.1% of the difference between for-profit and 
          non-profit default rates and 38.6% of the difference between 
          for-profit and public college default rates is attributable to 
          various risk factors among student populations.  However, as 
          noted by FinAid.org, this research does not evaluate whether the 
          greater prevalence of high-risk students at for-profit colleges 
          is due to open enrollment policies and better service or the 
          exploitation of a vulnerable population.  Supporters of this 
          bill argue that education programs should prepare all students 
          for gainful employment and that it is unacceptable to suggest 
          that low-income and minority students should expect lower 
          salaries and higher debts upon graduation. 

          Impact on students  .  Opponents of this bill argue that this bill 
          would potentially result in denying access to at-risk students.  
          However, under this proposal, student eligibility requirements 
          would not change.  The degree to which new Cal Grant recipient 
          students would be affected by changes in Cal Grant institutional 
          eligibility would depend on a student's ability to gain 








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          admission to a Cal Grant eligible institution. Renewal Cal Grant 
          recipients attending an institution that loses eligibility would 
          be provided with the option of taking their Cal Grant award to 
          an eligible institution or continuing at their current 
          institution with a 20% reduction in their award amount. 

           Governor's budget proposal  .  As previously noted, institutions 
          with more than 40% of their undergraduate students borrowing 
          federal loans must have a three-year cohort default rate of less 
          than 24.6% to be eligible for new and renewal Cal Grant awards 
          in the 2011-12 academic year.  Under current law this threshold 
          increases to 30% for each subsequent year. The Governor's budget 
          proposes to freeze the default rate limit at the current-year 
          level.  The Legislative Analyst's Office supported this 
          proposal.  The Assembly Budget Subcommittee No. 2 on Education 
          Finance took action on March 7, 2012 to refer this proposal to 
          policy committee.     

          Arguments in support  .  The Institute for College Access and 
          Success supports this bill and argues that by using a metric, 
          applied to colleges of all types, that better measures a 
          student's risk of default, this bill better targets Cal Grant 
          dollars to support student access and success and sends a strong 
          message that access to an affordable and quality college 
          education is a priority for the state. 

           Arguments in opposition  .  The California Coalition of Accredited 
          Career Schools (CCACS) argues that loan default rates are not 
          necessarily indicative of the quality of education that students 
          receive, and ignores the risk factors of the nontraditional 
          students this sector serves-students who are financially 
          independent, single parents, first generation and full-time 
          workers.  CCACS argues that these risk factors affect 
          persistence and attainment which ultimately elevates the risk of 
          a student defaulting; accounting for 60% of the difference in 
          default rates between for-profit and non-profit colleges and 
          nearly 40% of the difference in default rates between for-profit 
          and public colleges.  CCACS raises concerns that this bill could 
          have an unintended consequence of denying access to at-risk and 
          nontraditional students.   

           Phased implementation  .  As previously noted, opponents of this 
          bill have raised concerns that this proposal could result in 
          denying non-traditional students access to postsecondary 
          education.  The author has indicated that this bill is intended 








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          to establish reasonable expectations and thresholds that ensure 
          Cal Grant qualifying institutions take proactive steps to reduce 
          the debt amounts and loan default rates among their student 
          populations.  If, however, the committee is concerned about the 
          immediate impact of this proposal on Cal Grant qualifying 
          institutions, one option would be to adopt the Governor's 
          proposal to maintain the loan default rate at its current level 
          of 24.6 through the 2013-14 academic year and then phase in the 
          implementation of the risk index bill over five years. 

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          California Civil Rights Coalition 
          California Federation of Teachers 
          California State Student Association 
          California Student Aid Commission
          Consumer Federation of California 
          Consumers Union 
          The Education Trust - West 
          The Institute for College Access & Success 
          Public Advocates Inc. 
          University of San Diego School of Law's Center for Public 
          Interest Law 
          University of San Diego School of Law's Children's Advocacy 
          Institute

           Opposition 

           American Career College/West Coast University
          California Association of Private Postsecondary Schools
          Carrington College California
          DeVry University
          Kaplan, Inc.
          The California Coalition of Accredited Career Schools
          University of Phoenix
           
          Analysis Prepared by  :    Laura Metune / HIGHER ED. / (916) 
          319-3960