Calif. cracks down on aid to for-profit colleges

Posted on: July 2nd, 2012 by Sarah Pavlus 3 Comments

The University of Phoenix campus in Washington, D.C. The American Independent.

California lawmakers dealt a blow to the for-profit college industry last week by disqualifying poorly performing schools from a key state financial aid program.

The California budget, which Governor Jerry Brown signed last Wednesday, imposes stricter eligibility standards on schools participating in the state’s generous Cal Grant program.

The new standards eliminate from the program some of the biggest players in the for-profit college industry, including the University of Phoenix, the country’s largest for-profit college.

In a quarterly earnings report released just days before the new standards were adopted, the Apollo Group — the University of Phoenix’s parent company — acknowledged that the potential loss of Cal Grant eligibility could have serious consequences for the company. The changes, the company warned, could lead to “increased student borrowing” and “decreased enrollment.”

Loss of the Cal Grant funds, according to the filing, could also have “adverse impacts” on the school’s ability to comply with the so-called “90/10 Rule” — a federal law requiring that no more than 90 percent of a school’s revenue come from federal student aid.

Last year, the University of Phoenix derived 86 percent of its revenue from federal student aid. If that figure were to rise above 90 percent for two consecutive years — a prospect made more likely by the school’s loss of state-funded Cal Grants — the school would no longer be eligible for federal student aid.

Still, one industry analyst issued a comment Monday afternoon stating that the new Cal Grant restrictions do not pose a significant threat to the Apollo Group.

“Despite APOL describing a potential risk to 90/10 mentioned in its most recent 10Q, we estimate that the change would impact APOL by approximately 0.5%, still leaving the company safely under the 90% mark,” wrote Trace A. Urdan, a senior analyst at Wells Fargo Securities.*

The University of Phoenix, whose students received an estimated $20 million in Cal Grants last year, has previously lobbied successfully against tougher performance measures. The school argues that the new rules unfairly “penalize” its students.

According to University of Phoenix spokesman Rick Castellano, “The final budget uses flawed and misleading data to penalize non-traditional students and would-be Cal Grant recipients based on their choice of a school that best fits their education needs.”

California’s new performance standards rely in part on federal graduation rate data. However, that rate only measures first-time, full-time students.

To qualify for the Cal Grant program, schools must now have a six-year graduation rate above 30 percent and a student loan default rate below 15.5 percent.

Castellano said the University of Phoenix will “continue to work on behalf of our students to reinstate eligibility for Cal Grants.”

Castellano declined to elaborate on how the University of Phoenix’s loss of Cal Grant eligibility may impact the school’s compliance with the 90/10 Rule.

Consumer advocates, who argue that valuable state dollars must be targeted to institutions that best serve students, are praising the tougher standards.

Debbie Cochrane, a financial aid expert at The Institute for College Access & Success, issued a statement saying the new performance standards “position California as a national leader in college accountability.”

Assemblymember Bob Wieckowski (D), who offered a bill earlier this year that would have implemented standards similar to those included in the budget, said the changes will “ensure that our valuable and limited Cal Grant funds go to responsible higher education institutions.”

“Education should be a tool used to improve the quality of people’s lives and to provide a pathway out of poverty, not into it,” he added.

*This story has been updated to include the assessment of Wells Fargo Securities Senior Analyst Trace A. Urdan.

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