Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Student Aid Commission (7980)

The Student Aid Commission provides financial aid to students through a variety of grant, loan, and work-study programs. The commission's proposed 2001-02 budget includes state and federal funds totaling $1.2 billion. This is $138 million, or 13 percent, more than estimated expenditures in the current year.

The budget requests $670 million from the General Fund for the commission. This is $138 million, or 26 percent, more than estimated expenditures in the current year. Of the General Fund total, 97 percent is for direct student aid for higher education. The balance is for the cost of operating the commission (2.2 percent) and an outreach program for K-12 students (1.2 percent).

Major General Fund Budget Changes

Figure 1 shows the major changes proposed for the commission's budget in 2001-02. As the figure shows, the budget requests a General Fund increase of $138 million. The major factor driving this change is growth in the number and amount of Cal Grant awards. The commission projects that the number of Cal Grant recipients will increase from 152,201 in the current year to 209,180 in 2001-02, an increase of 37 percent. This increase is a result of expansion of the Cal Grant program authorized by Chapter 403, Statutes of 2000 (SB 1644, Ortiz). The budget also requests a total of $6.4 million on an ongoing basis for costs associated with administering the expanded grant program. The commission estimates that it incurred costs of $5.7 million in the current year for this purpose.

The budget includes $14.6 million to pay holders of Assumption Program of Loans for Education (APLE) warrants. This is $9.1 million, or 163 percent, more than estimated expenditures for the program in 2000-01. This results from an increase in the number of warrants that have become redeemable for college-loan repayments. Under the APLE program, the state issues warrants to prospective K-12 teacher-training students. For a student that receives an APLE warrant, the commission will pay off up to $19,000 of the student's college loan debt, provided the student obtains a teaching credential and teaches in certain subject areas or in disadvantaged schools for a specified number of years (four years to obtain maximum value of a warrant).

The Cal Grant Program

The Cal Grant Program, which is administered by the commission, is providing grant aid to over 152,000 college and vocational education students in 2000-01. There are four types of awards:

• Cal Grant A. These awards cover systemwide fees at the California State University (CSU) and the University of California (UC), or up to $9,708 of tuition at private colleges and universities. In 2000-01, 72,462 college students are receiving Cal Grant A awards, worth over $306 million.
• Cal Grant B. These awards cover the same fees as Cal Grant A excluding fees for the freshman year of college. The award also provides recipients with a $1,551 stipend toward other expenses for all four years of college. In 2000-01, 67,977 college students are receiving Cal Grant B awards, worth almost $173 million.
• Cal Grant C. These awards cover up to $2,592 in fees at vocational schools and up to $576 for books and supplies. In 2000-01, 9,286 students are receiving Cal Grant C awards, worth $14.8 million.
• Cal Grant T. These awards cover tuition in post-baccalaureate programs leading students to an initial teaching credential. In 2000-01, 2,476 teacher-training students are receiving Cal Grant T awards, worth $10 million.

Chapter 403 made several significant changes to the Cal Grant A and Cal Grant B programs. As a result, many more Californians will receive grant aid in the coming years. The commission projects that, because of these changes, the state will award 29,704, or 17 percent, more Cal Grants in 2001-02 (209,180 versus 179,476) than it would have issued in 2001-02 under prior law. The commission projects that Chapter 403 will almost double the number of Cal Grants in 2006-07 (402,590 versus 217,539) compared to prior law. It projects that General Fund expenditures in that year will be $586 million, or 82 percent, more than they would have been under prior law ($1.3 billion versus $716 million).

Below, we summarize how the new law changes the Cal Grant rules, and evaluate the commission's projections for Cal Grant recipients and expenditures.

The New Cal Grant Program

The new Cal Grant program differs from the prior program in several important ways.

Entitlement for Cal Grant A and Cal Grant B Awards. Under prior law, the commission established most of the eligibility criteria for Cal Grants administratively. Because funding of Cal Grants often was insufficient to provide Cal Grants to all eligible students, however, the commission rationed awards by ranking eligible students based on their academic records and other factors, subject to a law specifying that it must provide the same number of new Cal Grant A and new Cal Grant B awards. The new program specifies that all high school graduates (that is, entering freshmen) and community college transfer students meeting the criteria for Cal Grant A and B awards shall receive an "entitlement" award. The new law provides for a continuous appropriation of whatever funds are needed to provide grants to these eligible students. The new law also specifies that the commission shall allocate 22,500 "competitive" Cal Grant A and Cal Grant B awards to students not otherwise eligible for entitlement awards (for example, students who did not apply as freshmen). Cal Grant C (vocational studies) and Cal Grant T (teacher training) awards remain competitive and limited by appropriated funds.

Eligibility Criteria in Statute. Under prior law, the commission established most of the criteria for Cal Grant eligibility administratively. The new law specifies minimum grade-point averages (GPAs) that students must have achieved prior to applying. (High school graduates need GPAs of at least 3.0 for Cal Grant A awards and 2.0 for Cal Grant B awards. Transfer students need a college GPA of at least 2.4 for both awards.) The new law also places income and asset ceilings in statute and requires that the commission adjust them annually for inflation. (The limits for 2001-02 are comparable to those administratively established for 2000-01, adjusted for inflation.)

Additional Application Deadline for Competitive Awards. Under prior law, high school seniors and prospective transfer students had to apply for Cal Grant A and Cal Grant B awards by March for the following fall college semester. The new law provides that one-half of the 22,500 competitive Cal Grant awards be issued to students applying in March, and the other half to community college students who apply in September of the same year.

Figure 2 summarizes the purpose, eligibility requirements, and awards for the Cal Grant A, Cal Grant B, and Cal Grant C programs. The Cal Grant T program, which provides grants to financially needy teacher-education students, uses the same eligibility criteria as the Cal Grant A program.

Update Needed on Cal Grant Cost Projections

We recommend the commission give budget sumcommittees a detailed written update of its Cal Grant projections at the time of the administration's May Revision request.

Prior to the new law, the annual budget act authorized both the total amount of funding and total new awards for the Cal Grant program for the year. In the past, the commission has generally been able to project out-year costs of the program accurately. With the significant program changes made by Chapter 403—including provisions for Cal Grant entitlements and two application deadlines—there is considerable uncertainty about the number of participants and the General Fund cost for 2001-02. The uncertainty is even greater for the out-years. This is because the new law probably will induce behavioral changes among students potentially eligible for the Cal Grants. Indeed, one goal of the Legislature in modifying the program was to encourage more eligible students to apply for awards.

Commission Projections Appear Reasonable. Figure 3 shows the commission's projections for Cal Grant participation and cost for the budget year through 2006-07, when the effects of the new law likely will be fully realized.

The commission simulated the award process under the new program using the financial and academic profiles of students who applied in the most recent awards cycle. The commission adjusted these projections to reflect possible increases in applications due to the new laws. The commission's cost projections assume, for example, that application rates among eligible students will increase steadily each year until they are 24 percent above current rates. These assumptions are not based on a statistical model of student behavior, but rather the commission's "best guess" as to how people will respond to the new law. While the estimates appear reasonable, future Cal Grant costs may vary significantly.

Include Updated Projections in May Revision. Because of the unavoidable uncertainty in the projections, we recommend that the commission advise the Legislature at the time of the May Revision of any new information about program participation or cost. The commission will have more information upon which to make its projections because the first round of applications under the new law are due in March.

Report Overdue on Teacher Preparation Financial Support

We recommend the California State University, University of California, Association of Independent California Colleges and Universities, and California Student Aid Commission report during budget hearings on their study of financial aid programs for students in teacher preparation programs.

During deliberations on the 2000-01 budget, the Legislature sought information on the relative effectiveness of programs designed to increase the number of students training for and entering the teaching profession. Specifically, the Legislature asked the CSU, the UC, the Association of Independent California Colleges and Universities, and the commission for information on the relative cost-effectiveness of funding:

• State Teacher-Preparation Programs. The state provides CSU with $6,360 per year and UC with $9,158 per year for each additional teacher-training enrollment.
• New Cal Grant T Awards. The commission awards grants to students to cover tuition in teacher-preparation programs at public and private colleges and universities. Currently, the commission is authorized to award a maximum of 3,000 grants each year, at an annual General Fund cost of $10 million.
• New APLE Warrants. The APLE authorizes the commission to issue warrants to prospective teacher-training students. The commission is funded to assume up to $19,000 in student-loan debt for each APLE warrant recipient that obtains a credential and teaches in specified disadvantaged schools or in specified subject areas (such as math and science). The commission is authorized to issue 6,500 warrants to prospective teachers each year. The budget requests over $14 million in 2001-02 to assume student-loan debt for recipients now eligible to redeem warrants.

Unfortunately, little is known about the relative effectiveness of these three approaches in increasing the number of teachers in K-12 classrooms. In its Supplemental Report of the 2000-01 Budget Act, the Legislature asked the commission to lead public and independent higher education institutions in a study of the three approaches. The Legislature directed the commission and institutions to report their findings by October 30, 2000. The Legislature had not received the report at the time this analysis was prepared.

The Legislature needs this report to evaluate options for increasing the number of teachers. We recommend, therefore, that the commission and universities comply with the Legislature's directive. They should be prepared to comment on their research during budget hearings.