A little-known California law has dealt a blow to nearly half of the for-profit college campuses in the state, barring them from offering students a coveted Cal Grant this year.
The law cracks down for the first time on schools with high student loan default rates, meaning graduates aren't paying back the money they owe even three years after leaving school.
"It's a sign that the institution did not prepare them for a job so they could repay their loan," said Robert Shireman, who, as deputy undersecretary of education in the Obama administration, oversaw reforms in student lending.
Now, California is tying participation in the Cal Grant program to colleges' three-year student loan default rates.
No public campuses are affected by the law, SB70, because none has the toxic combination of a high percentage of borrowers where at least 1 in 4 defaults.
But 40 percent of California's "private career colleges" do. Of 165 such campuses in this state, 67 have three-year default rates of at least 24.6 percent, the legal cutoff.
They include some or all campuses of popular colleges: Everest, Carrington (formerly Western Career College), Kaplan, ITT Technical Institute, WyoTech, Heald and more.
"I'm mad. This pretty much ruined my credit," said Rigo Herrera, who owes $37,000 on a $27,000 federal loan he took out for a pre-nursing program at Everest College in Alhambra (Los Angeles County). He graduated from the 12-month program in 2008 but said he didn't learn enough to pass the license test and get a job.
"If they're getting punished, that makes me happy," said Herrera, who is in default.
The new law is supposed to punish such schools by depriving them of students who get Cal Grants.
"It's about getting their house in order, aiming them away from overaggressive promises they can't keep," Shireman said.
Students at for-profit colleges get about $4,000 to $10,000 in state aid on average, depending on the type of grant. When SB70 took effect this fall, about 4,900 students applying to for-profit colleges suddenly became ineligible or were offered a partial grant if they were already enrolled, according to the California Student Aid Commission.
The commission doesn't know what happened to most students at the affected schools but says at least 597 switched schools or withdrew.
Borrowers in default
One company, Corinthian Colleges, owns more than one-fourth of the schools booted from the Cal Grant program.
All 14 of its Everest Colleges – including those in San Francisco, Hayward and San Jose – were barred. Depending on the campus, 30 to 45 percent of borrowers are in default. Not everyone at Everest applies for a Cal Grant, mainly because some programs last just 10 months. But about 320 students were eligible to receive a total of $756,000 last year.
Corinthian also owns nine Heald Colleges. Those in Fresno and Stockton had default rates high enough to cost them their Cal Grants. More than 1,300 students at the two campuses were eligible to receive $6.2 million last year.
Corinthian's WyoTech campuses in Fremont and Long Beach were also kicked out of Cal Grants.
There, 122 students were eligible to receive $186,000 in state aid last year.
Company spokesman Kent Jenkins downplayed the Cal Grant loss, calling its impact muted.
"At the same time, we recognized that Corinthian's default prevention programs were not adequate," he said.
So the company "invested tens of millions of dollars" to reduce default rates, Jenkins said. It bought technology to keep track of graduates and hired staff to better communicate with students about their financial obligations.
Another school that lost access to Cal Grants is tiny Empire College in Santa Rosa, perhaps the polar opposite of Corinthian. Privately owned, it has offered classes in business and law for more than 50 years.
College officials were alarmed at being on the roster of bad-behaving schools.
"I don't want a default rate like that," said Empire President Roy Hurd, who hired a financial services company to help the school lower its default rate by communicating more with students.
Three campuses that lost access to Cal Grants are owned by ITT Educational Services, in which University of California Regent Dick Blum is an investor. His firm, Blum Capital Partners, invested almost $239 million as of September.
Rather than try to reduce their default rates, however, ITT officials say they will ask the U.S. Department of Education to simply recalculate them.
For-profits aren't the only schools to lose access to Cal Grants. Nine nonprofit private colleges also lost them, including Patten University, a Christian school in Oakland.
The law may ease up in July, when the cutoff default rate is supposed to rise from 24.6 percent to 30 percent.
Gov. Jerry Brown has proposed keeping the tougher rate, a matter for state lawmakers to decide.
In a belt-tightening maneuver, Brown also wants to reduce Cal Grant awards for private education and make it harder for students to qualify for some awards by raising the grade-point average needed to qualify. At the Institute for College Access & Success in Oakland, which focuses on student debt issues, analyst Debbie Cochrane says the state should continue holding colleges to the tougher standard.
"It would be perverse to allow the requirements for colleges to get weaker while proposing the requirements for students become more stringent," she said.
Cal Grants and the law
For more on SB70 and schools affected by the law, see links.sfgate.com/ZLGZ and links.sfgate.com/ZLGY.