A new California law that cuts off Cal Grants to colleges whose students default on federal loans at high rates will produce less than half of the previously expected budget savings – thanks to a data mix-up by the U.S. Department of Education.
An analysis of the new, corrected data released April 21 by the department shows the state will save an estimated $8 million, rather than the previously expected $19 million savings, said analyst Judy Heiman of the nonpartisan Legislative Analyst's Office.
The new rule signed into law by Gov. Jerry Brown on March 24 aimed to save money while also penalizing colleges that get a large amount of tax dollars for student aid and have low graduation and job placement rates.
Under the policy, colleges with more than 40 percent of undergraduates taking out federal loans and at least 24.6 percent of borrowers defaulting on federal loans within three years of beginning repayment cannot accept new Cal Grants from students in the 2011-12 academic year. Cal Grant recipients returning to these schools will see their scholarships reduced by 20 percent.
The law focused on the three-year draft default rates published by the U.S. Department of Education in February. Using those numbers, the California Student Aid Commission put out a list [PDF] of 94 affected colleges, most of which were for-profit career colleges such as Everest College and ITT Technical Institute.
But the Department of Education revised its figures last month, saying it had inadvertently included borrowers who defaulted on their loans about three months past the three-year window. The mistake had accidentally amplified the rates by including too many borrowers in the calculation.
As a result, about 21 of the 94 colleges on the Cal Grant cutoff list appear to now be eligible to continue accepting the scholarships, according to a California Watch analysis of data from the California Student Aid Commission and the U.S. Department of Education.
For example, the erroneous data would have kept students at Fremont College in Cerritos from being able to apply for new Cal Grants as of Fall 2011. But the corrected information shows 22.54 percent of borrowers defaulted within three years – that's below the cutoff, meaning the college will avoid the penalty.
California Student Aid Commission spokeswoman Louise Shroder declined to comment on the number of colleges affected or the change in estimated savings, saying the commission is still reworking the final list of ineligible colleges and is in discussions with lawmakers.
The Department of Education released the three-year rates to colleges so they could plan for future changes in the way the government holds high-default institutions accountable.
Under current law, the department looks at the number of student borrowers who default within two years, not three. Colleges with high default rates risk losing access to federal loan programs. But under the Higher Education Opportunity Act, the government will begin looking at the rate for students who default within three years – and will start sanctioning colleges based on these rates in 2014.
Unlike official two-year default rates, the three-year rates are less thoroughly vetted – and don't take into account challenges or appeals from colleges.
For-profit college representatives have criticized California lawmakers for using the rates.
"Why would the state use information, originally put out by the federal Department of Education in a press release as an informational item (not a report) on three-year default rates, and recently disavowed by the department, to set groundbreaking educational policy in California?" Robert Johnson, executive director of the California Association of Private Postsecondary Schools, wrote in a May 2 Sacramento Bee editorial.
But Debbie Cochrane, program director for the Institute for College Access and Success, said the three-year rates give a more accurate picture of loan defaults – in part because it takes many months of missed payments to default on a loan.
"The figures don't get as vetted in these trial rates as they do for the official rates," she said. "In general, the three-year rates are a more complete measure of student defaults."