Legislative Analyst's Office Analysis of the 2002-03 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 2002-03 budget includes state and federal funds totaling $1.3 billion. Of this amount, $734 million is General Fund support. Of the total General Fund appropriation, 97 percent is for direct student aid for higher education. The balance is for the cost of operating the commission (1.7 percent) and administering an outreach program for K-12 students (1.2 percent).

Major General Fund Budget Changes

Figure 1 provides a summary of the proposed General Fund changes from the 2001-02 estimated budget. As the figure shows, the budget requests a total General Fund increase of $162 million, or 28 percent, more than estimated General Fund expenditures in the current year. This amount includes a $3.3 million reduction in state operations (due primarily to an adjustment for one-time appropriations in the current year) and a $166 million augmentation for the commission's local assistance programs. The local-assistance augmentation includes $155 million (or 29 percent more) for the Cal Grant program and $11 million (or 90 percent more) for the Assumption Program of Loans for Education (APLE).

The budget includes a total of $694 million for all Cal Grant programs. This amount includes: (1) $361 million for the new Cal Grant Entitlement program; (2) $95.5 million for the new Competitive Cal Grant program; (3) $213 million to renew existing Cal Grant awards for students issued awards prior to the two new programs; (4) $14.2 million for the Cal Grant C program, which serves vocational-education students; and (5) $10 million for the Cal Grant T program, which serves teacher-education students.

As Figure 2 shows, the budget proposal assumes that the total number of Cal Grant awards (both new and renewal awards) will grow by more than 33,300 between the current year and budget year—reaching a total of almost 210,000 awards in 2002-03. The budget proposal assumes that the commission will issue 65,000 new entitlement awards and, as Chapter 403 specifies, 22,500 new competitive awards.

For the APLE program, the budget includes a total of $22 million. Under this program, the state issues redeemable warrants to prospective K-12 teacher-training students. Students who receive warrants can have a maximum of $19,000 of their college loan debt forgiven (paid by the state), provided they (1) obtain a teaching credential and (2) teach for four years in certain subject areas or in disadvantaged schools. (A portion of their loan is forgiven annually at the completion of each school year.)

The commission expects to redeem a total of almost 7,800 warrants in 2002-03, which is approximately 3,400 more warrants than redeemed in the current year. The number of new warrants the commission is authorized to issue has increased from 400 warrants in 1997-98 to 6,500 warrants in 2000-01. The 2002-03 budget proposes again to authorize 6,500 newwarrants. Given this volume, the total cost of the APLE program is likely to grow considerably over the next several years as more of these students begin to redeem their warrants.

Cal Grant Programs Prior to 2001

Prior to 2001, the commission distributed all Cal Grant awards on a competitive basis and established award criteria administratively. Students could compete for a Cal Grant A, Cal Grant B, Cal Grant C, or Cal Grant T award.

• Cal Grant A awards were for students with a relatively high grade point average (GPA) and moderate financial need who were enrolled in academic programs at least two years in duration.
• Cal Grant B awards were for students typically with a lower GPA but greater financial need who enrolled in academic programs at least one year in duration.
• Cal Grant T and Cal Grant C awards were (and continue to be) for students with academic and financial characteristics the same as those for Cal Grant A awards, but Cal Grant T awards are only for students enrolled in postbaccalaurate teacher-education programs and Cal Grant C awards are only for students enrolled in vocation-educational programs.

Awards Based on Scoring System. Students seeking one of these awards were scored according to several factors—including GPA, family income and household size, household status, parents' educational level, and disadvantaged background (such as graduating from a high school with a large proportion of students participating in the free or reduced-price lunch program). Each year, the score needed to obtain an award depended on the amount of available funding, the number of applicants, and the make-up of the applicant pool.

New Entitlement and Competitive Programs

Chapter 403, Statutes of 2000 (SB 1644, Ortiz), significantly expanded and revised the existing Cal Grant program. Most significantly, Chapter 403 created a new entitlement program. This program supports recent high school graduates (who apply within nine months of high school graduation), as well as relatively young students (less than 24 years old), who are transferring from a community college to a four-year university. Depending on their academic performance and financial need, these students can receive either a Cal Grant A Entitlement or a Cal Grant B En titlement award. The number of new entitlement awards issued each year depends on the number of eligible students.

Award Criteria Specified for Entitlement Program. Chapter 403 specified the award criteria for entitlement awards, thereby allowing high school graduates and transfer students to know as early as possible whether they qualified for an award. For a Cal Grant A entitlement award, the primary award criteria for a recent high school graduate are:

• Have a minimum 3.0 grade point average.
• Meet income and asset ceilings. (The income ceiling for a dependent in a family of four is $66,200 and the asset ceiling is $51,200.)
• Demonstrate financial need. (Students are defined as financially needy if the difference between their cost of college attendance and expected family contribution is at least $1,500 plus the maximum program award.)

Transfer students must meet the same economic criteria for a Cal Grant A entitlement award but they need to have only a 2.4 GPA.

For a Cal Grant B entitlement award, the primary eligibility criteria for a recent high school graduate are:

• Have a minimum 2.0 grade point average.
• Meet income and asset ceilings. (The income ceiling for a dependent in a family of four is $34,800 and the asset ceiling is $51,200.)
• Demonstrate financial need. (Students are defined as financially needy if the difference between their cost of college attendance and expected family contribution is at least $700.)

Again, transfer students must meet the same economic criteria for a Cal Grant B entitlement award but they need to have a 2.4 GPA.

Competitive Program Remains Similar to Prior Cal Grant Program, but Number of Awards Is Capped. In addition to establishing an entitlement program, Chapter 403 created a Competitive Cal Grant A and Competitive Cal Grant B program. These programs serve students who graduated from high school more than nine months ago, or are more than 23 years of age, or both. Chapter 403 specifies that the commission is to is sue 22,500 new Competitive Cal Grant A and Cal Grant B awards annually. The commission is to issue half of these awards to students who apply by a March 2 deadline and the other half to community college students who apply by a September 2 deadline. Community college students who do not receive awards in March are automatically placed in the September applicant pool.

Award Criteria—Competitive Program. These awards are distributed based upon a scoring system that is similar to that used in the prior Cal Grant program. As in the past, students seeking competitive Cal Grant A and Cal Grant B awards are ranked based upon several factors—including GPA, family income and household size, and parents' educational level—and the score needed to obtain an award depends on the total number of applicants and the make-up of the applicant pool.

No Change in Award Coverage. For the entitlement and competitive programs, the Governor's budget does not propose any changes in award coverage from the current year. Cal Grant A awards continue to cover tuition and educational fees (as do Cal Grant T awards). Cal Grant B awards continue to provide a subsistence award the first year of college and both a subsistence award and fee coverage for the remainder of college. (Cal Grant C awards continue to cover tuition, educational fees, books, and supplies for vocational programs.)

No Change in Maximum Award Amounts. The Governor's budget also does not increase maximum award amounts for any of these types of awards. As proposed, all maximum award amounts would remain at the following current-year levels:

• $9,708 for Cal Grant recipients attending private and independent institutions and full mandatory fees for recipients attending the University of California ($3,429) and the California State University ($1,428).
• $1,551 for recipients of Cal Grant B subsistence awards.
• $2,592 for recipients of Cal Grant C awards.
• $576 for recipients of Cal Grant C book and supply awards.

The Governor and the Legislature determine award amounts annually through the budget process. Award amounts increased between 1999-00 and 2000-01. Except for a $3 increase in the Cal Grant B subsistence award between 2000-01 and 2001-02, award amounts have not increased since 2000-01.

First-Year Implementation of Chapter 403

As noted earlier, Chapter 403 launched a significantly different Cal Grant program. Most notably, the legislation created relatively powerful incentives for recent high school graduates to pursue college immediately and for community college students to apply for Cal Grant financial assistance and transfer to four-year universities.

Data on the first-year implementation of Chapter 403 suggests that the legislation had several significant consequences, including: (1) altering the recipient pool, (2) changing the relative distribution of Cal Grant A and Cal Grant B awards, (3) issuing fewer awards than initially assumed, and (4) potentially denying some eligible students awards because schools did not transmit GPA verification forms (which are required for all awards) to the commission prior to the deadlines.

Grant Recipients Are Now Primarily Recent High School Graduates And Community College Students Rather Than Older Students

Chapter 403 created powerful incentives to attend college immediately after high school or transfer from a community college to a four-year university within a relatively short period of time (about five or six years). As a result, the number of high school graduates and community college students receiving new Cal Grant awards increased substantially between 2000-01 and 2001-02 (the first year of the new entitlement and competitive programs). In contrast, the number of new Cal Grant recipients who were older and not attending community colleges decreased substantially.

Substantial Growth in Recent High School Graduates Receiving Awards. In 2000-01, approximately 31,000 recent high school graduates were issued Cal Grant A and Cal Grant B awards. In 2001-02, more than 48,000 recent high school graduates were issued Cal Grant A and Cal Grant B entitlement awards, representing an increase of 55 percent. (In contrast, the number of high school graduates grew by less than 2 percent.)

Even Greater Growth in Awards Issued to Students Attending Community Colleges. Similarly, in 2000-01, a total of approximately 17,500 new Cal Grant recipients attended community colleges. In 2001-02, a total of more than 30,000 new Cal Grant recipients attended community colleges, representing growth of more than 70 percent. (The number of awards for 2001-02 is split about evenly between entitlement awards and competitive awards.) Moreover, students attending community colleges received almost 70 percent of all competitive awards.

Older Students, Especially Those Not Attending Community Colleges, Received Fewer Awards. The commission states that prior to Chapter 403 the majority of Cal Grant recipients were older, nontraditional students (such as those students who did not go directly to college from high school). It states that these students comprised approximately 60 percent of all new Cal Grant recipients in 2000-01, whereas they comprised less than 32 percent of all new Cal Grant recipients in 2001-02.

Older students attending postsecondary systems other than the community colleges were most affected by Chapter 403—receiving substantially fewer awards in 2001-02 compared to the prior year. For example, approximately 11,700 older students attending CSU received awards in 2000-01, whereas less than 3,400 of these students received awards in 2001-02—a decline of more than 70 percent. Similarly, approximately 6,500 older students attending private and independent colleges received awards in 2000-01, whereas approximately 1,200 of these students received awards in 2001-02—a decline of more than 80 percent. Because awards for older students who are not attending a community college are limited to one-half of the 22,500 competitive awards, they will make up a decreasing proportion of all new Cal Grant recipients.

Additionally, many of these students can demonstrate financial need and are academically qualified, but they are now less likely to obtain an award. For example, there were more than 41,000 eligible students competing for the 11,250 awards offered in March 2001 who did not receive an award.

Competitive Awards Have Become More Competitive. The statutory limit of 22,500 competitive awards has resulted in the commission's using much more selective criteria in determining who will receive these awards. For example, in 2000-01 and 2001-02, the commission assigned students that applied for competitive awards a score between 1 to 100, with higher scores representing more financial need, lower family income and assets, larger families, less parental education, and higher GPAs. To receive a new award in 2000-01, students attending a community college needed a score of 42 or higher, and students attending four-year universities needed a score of 54 or higher. By comparison, in the March 2001 pool (of the 2001-02 award year), older students (attending either a four-year university or a community college) needed a score of 82 or higher to receive an award.

More Cal Grant B Awards Are Now Issued

In addition to changing the recipient pool, Chapter 403 also changed the relative distribution of Cal Grant A and Cal Grant B awards. Prior to Chapter 403, the number of Cal Grant A awards and the number of Cal Grant B awards were the same. Chapter 403 removed this requirement, allowing the proportion of Cal Grant A and Cal Grant B awards to fluctuate annually depending upon the applicant pool. The result in the first year was that Cal Grant A awards comprised roughly 30 percent of all awards, and Cal Grant B awards comprised roughly 70 percent.

More Cal Grant B Awards Raises Out-Year Costs. Cal Grant B recipients receive only a subsistence award (of approximately $1,500) their first year of college. In subsequent years, these students receive both a subsistence award (which remains at $1,500 each year) and an award to cover educational fees and tuition. The four-year cost of a Cal Grant B is therefore typically greater than the four-year cost of Cal Grant A. (For example, for a UC student, the four-year cost of a Cal Grant B award is approximately $2,800 more than the four-year cost of a Cal Grant A award.) Thus, the fiscal result of changing the distribution of Cal Grant A and Cal Grant B awards is to reduce first-year costs but increase out-year costs.

Fewer Awards Issued Than Commission Initially Projected

Much attention has been drawn to the fact that the commission did not issue as many new awards as it initially projected. Based upon the most recent official data, the commission issued approximately 81,400 new awards in 2001-02 compared to approximately 79,800 new awards the prior year. This is 1,600 additional new awards, which represents less than 2 percent growth. The commission had initially projected that it would issue more than 25,000 additional new awards, growing by almost 33 percent.

Inflated Projections. Many factors might explain why fewer new awards were issued than the commission projected. One explanation is that the original projections were based on inflated assumptions. For example, the commission assumed that it would issue approximately 41,200 additional new Cal Grant awards to high school graduates, an increase of 132 percent. As noted earlier, the commission did issue substantially more new awards to high school graduates—an increase of 55 percent—but this is still much lower than the commission's initial projection. Despite not meeting projections, the first year of implementing Chapter 403 did result in considerably more high school graduates being motivated to apply for and obtain Cal Grant awards.

Another possible reason for the failure to meet projections is that the commission's model apparently did not account for the likely change in the composition of the recipient pool. As noted earlier, the legislation capped the number of competitive awards due to cost considerations and concerns about potential growth in the program, thereby substantially reducing the number of awards available for older students. This offsetting effect, however, does not seem to have been incorporated into the commission's original projections.

Cal Grant Program Has Grown Dramatically Since Mid-1990s. Although the Cal Grant program so far has not expanded as significantly as many expected, it should be noted that the program has grown substantially since the mid-1990s. As Figure 3 shows, from 1995-96 to 2001-02, the number of new Cal Grant A and Cal Grant B awards issued annually grew by 140 percent.

High Schools and Community Colleges Need to Improve Transmission of GPA Verification Forms

Although inflated projections may partly explain why the commission did not meet its original growth targets, another reason might be that some high schools and community colleges did not transmit the GPA verification forms for all their students. This is just one of a number of tasks that agencies had to undertake in response to the new award programs. It was, however, one of the most important new tasks because the commission considered students ineligible for awards until it received their GPA verification form. (Students can send these forms to the commission themselves, or they can ask their high school or community college to send their verification form directly.)

Transmission Rates Vary Widely. In implementing the first year of the new program, the commission attempted to communicate with high schools and community colleges to inform them of the number of students for whom it had received GPA verification forms. For example, the commission sent frequent (weekly or daily) email messages to county superintendents updating them on the number of all GPA verification forms it had received from high schools in that region.

Additionally, because several community colleges did not transmit all their GPA verification forms before the September 2 deadline, the commission extended the deadline to October 15. Despite these efforts, a number of schools and colleges evidently failed to transmit GPA verification forms for a substantial portion of their students.

Provide Update on Second-Year Implementation of Entitlement Program and Future Cost Projections

We recommend the Legislature ask the commission to provide an update on: (1) the second-year implementation of the entitlement program and (2) the revised out-year award and cost projections for the entitlement program.

Given the continuing uncertainty about growth in the entitlement program, we recommend the commission provide an update on the second-year implementation of the entitlement program. After the upcoming March 2 application deadline for the entitlement program, the commission will have additional information on the number of awards it is likely to issue in 2002-03. Although the 2002-03 Governor's budget assumes much less growth in the entitlement program between the current year and the budget year (compared to the assumptions used during the last budget cycle), the budget still assumes that the number of entitlement awards will increase by 34 percent. Additionally, the Governor's budget assumes a 20 percent attrition rate (that is, it assumes that one in five original entitlement recipients will not renew their award). Because these initial assumptions might be unreliable, the commission should provide updated information during budget hearings on the number of new entitlement awards and renewal awards granted for 2002-03.

Additionally, at the time of this writing, neither the commission nor the Department of Finance could provide revised out-year cost projections for the entitlement program. Given the uncertainty in projecting future participation, there remains considerable uncertainty in estimating costs—both in the budget year and in the out-years. We therefore recommend the Legislature ask the commission to provide updated out-year cost projections (based upon the assumptions used in the Governor's budget as well as actual participation as reflected in the March 2002 reward cycle).