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For-profit colleges took a hit this week in California, another sign that policy battles over the commercial higher ed sector may be shifting to the states.

Gov. Jerry Brown on Wednesday signed the state's budget, which he said reflects “tough choices” to close a $16 billion shortfall. Among the budget cuts was a $134 million reduction in spending on the generous Cal Grant financial aid program, a cut that will mostly affect students at for-profit colleges.

To be eligible to receive Cal Grants, the budget plan requires colleges to have a six-year graduation rate of at least 30 percent and a maximum three-year cohort default rate on students loans of 15.5 percent. Community colleges were exempt from the new standards, which apply only to institutions where more than 40 percent of students take out federal loans. (California’s community colleges don’t charge enough in tuition for federal loans to be an issue.)

Most for-profit colleges that operate in the state will run afoul of the new rules, including the University of Phoenix, ITT Technical Institute and others, according to The Sacramento Bee.

For-profits that will be knocked out of Cal Grants account for more than 80 percent of the sector’s total enrollment, said Judy Heiman, an analyst with California’s Legislative Analyst’s Office. She said a substantial number of students at private nonprofit colleges will also be affected, with about 15 percent of that sector’s enrollment losing eligibility.

Beyond the new eligibility rules, the budget imposes across-the-board cuts on maximum Cal Grant awards at private institutions. Students at private, nonprofit colleges will see an immediate 5 percent cut, thanks to a "veto cut" by Governor Brown, which will lower the maximum award to $9,223. Further cuts loom, and the Cal Grant for private colleges will top out at $8,056 in 2014.

However, for-profits will again absorb the biggest cuts, with a maximum Cal Grant award of $4,000 next fall, down from the current $9,708.

For-profits and their advocates said they have been targeted unfairly and that the sector was being subjected to double standards.

“The cuts will force students to either take out more loans to stay in school or drop out,” Laura Brown, president of the California Coalition of Accredited Career Schools, said in a written statement. “They’ll likely not attend a public institution because there’s not enough space.”

Heiman agreed that the state’s public systems might not have the capacity, at least in the short term, to serve students who can no longer afford to attend for-profits after the Cal Grant cuts. “It really raises the question of where these students go.”

The new rules will be phased in to minimize the impact on currently enrolled students. For example, only new students will be prohibited next year from receiving Cal Grants grants at for-profit colleges that do not meet the requirements. Students currently receiving Cal Grants will continue to qualify for the award for a year, but will have the amount reduced by 20 percent.

Sharing the Pain

Supporters of the Cal Grant cuts call them a prudent way to ensure reasonable quality at colleges that serve lower-income Californians.

“These sensible standards are long overdue,” wrote the Merced Sun-Star, in an editorial. “Preserving access to higher education for poorer students is important, but not at any price and not at any school.”

But the bottom line may have come from Lawrence Hershman, then a commissioner for the California Student Aid Commission, which administers Cal Grants, when the plan to cut back on financial aid spending for students who attend for-profits was announced in February.

“The public universities have taken on drastic cuts. It’s time for the for-profit colleges to share in some of the pain,” Hershman said then, in a written statement.

California’s public institutions are hardly out of the woods. They have been battered by several years of budget-slashing, and are anxiously awaiting the results of a fall referendum on a proposed tax increase. If the referendum fails, more “trigger cuts” will follow -- such as a $551 million reduction for community colleges. Those cuts could be the breaking point, some college leaders say, with serious impacts on student access and academic quality.

But the final decision on Cal Grants was a victory for public colleges, which had battled previously discussed cuts and the inclusion of a minimum G.P.A. standard for grant recipients.

For-profits also fought hard against Cal Grant cuts.

“We’re disappointed that the state has chosen politics and ideology over access and school choice,” said Rick Castellano, a spokesman for the Apollo Group, which owns the University of Phoenix.

Castellano and others criticized the data behind the new policies. For example, the budget relies on federal graduation rate data as one of the key metrics for Cal Grant eligibility. The federal calculations count only first-time, full-time students, which would omit nearly 80 percent of Phoenix's students in the state.

“The final budget uses arcane and flawed data to penalize nontraditional students,” Castellano said, “including single parents, veterans, first-in-family students.”

The new rules are rather complex, and will impact for-profits in a range of ways. 

For example, colleges that receive accreditation from the Western Association of Schools and Colleges (WASC) will be partially exempt from the cuts, said Kent Jenkins, a spokesman for Corinthian Colleges Inc., which owns Heald College.

“While we are troubled that the state has decided to impose a double standard for Cal Grant eligibility,” Jenkins said in a written statement, “the outcome for students at Heald College could have been much worse.”

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