BILL ANALYSIS Ó AB 573 Page 1 GOVERNOR'S VETO AB 573 (Medina and McCarty) As Enrolled September 16, 2015 2/3 vote -------------------------------------------------------------------- |ASSEMBLY: | 74-0 |(May 14, 2015) |SENATE: | 36-0 | (September 11, | | | | | | |2015) | | | | | | | | | | | | | | | -------------------------------------------------------------------- -------------------------------------------------------------------- |ASSEMBLY: | 79-0 |(September 11, | | | | | | |2015) | | | | | | | | | | | | | | | | | | -------------------------------------------------------------------- Original Committee Reference: HIGHER ED. SUMMARY: Provides financial and other assistance to students of Heald, Everest, and WyoTech campuses in California, which were owned by Corinthian Colleges, Inc. (CCI) and closed unlawfully on April 27, 2015. Specifically, this bill: AB 573 Page 2 1)Establishes Legislative intent that unencumbered restitution funds awarded to the state from a lawsuit involving CCI and its affiliate institutions, including Heald College, shall be used to repay any funds provided to students pursuant to this act. 2)Restores up to two years of Cal Grant and National Guard Education Assistance awards for students who enrolled at Heald and received awards in the 2013-14 or 2014-15 academic years, were unable to complete their educational programs, and withdrew between July 1, 2014, and April 27, 2015. Requires an eligible student to notify the California Student Aid Commission (CSAC) of his or her intent to use this restoration by January 1, 2017. 3)Authorizes, for a period not to exceed two years from the date of the closure of CCI, a state agency that provides certification, registration, or licensure to, on a case-by-case basis, consider for certification, registration, or licensure students who were enrolled in a program of CCI and did not receive the required certification, registration, or licensure due to the closure of CCI. Provides that consideration is at the discretion of the agency in accordance with its public protection mandate and applicable criteria established for consumer safety. 4)Increases the maximum allowable fund balance in the Student Tuition Recovery Fund (STRF) from $25 million to $30 million. 5)Finds and declares all of the following: a) CCI has been the target of consumer and taxpayer protection enforcement efforts by the federal government, the Attorney General, and other state and federal AB 573 Page 3 authorities; b) Based on findings of harm to students enrolled at CCI campuses, the United States Department of Education (USDE) announced debt relief programs to assist students, including: i) A student who attended a CCI campus that closed on April 27, 2015, and withdrew any time after June 20, 2014, is eligible to apply for a closed school loan discharge, so long as the student does not transfer credit and subsequently complete a comparable program at another institution; ii) A student who believes he or she was a victim of fraud or other violations of state law by CCI can apply for debt relief under borrower defense to repayment. The USDE has determined that CCI misrepresented job placement rates for a majority of programs at its Heald College campuses between 2010 and 2014 and is in the process of establishing a specific process for federal loan discharge for these Heald students; and, iii) A CCI student who intends to submit a borrower defense claim may request loan forbearance while a claims review process is established and the claim is reviewed. c) Pursuant to Education Code Section 94923, the STRF exists to relieve or mitigate a student's economic loss caused by a documented violation of certain laws or by institutional closure, as specified; d) On October 10, 2013, the California Attorney General AB 573 Page 4 filed a lawsuit against CCI for false and predatory advertising, intentional misrepresentations to students, securities fraud, and unlawful use of military seals in advertisements, in violation of the 2007 final judgment in the People of the State of California v. CCI; e) On April 16, 2015, the Bureau for Private Postsecondary Education (BPPE) issued an emergency decision ordering CCI to cease enrollment of any new students in all programs at Everest College and WyoTech locations in California effective upon close of business April 23, 2015; f) It is consistent with the purpose of STRF to provide assistance to CCI students to obtain federal and private loan discharge and other financial aid relief. 6)Provides $1.3 million from STRF to eligible nonprofit community service organizations (CSOs) in order to assist eligible CCI students with federal and private loan discharge and other financial aid relief. The bill establishes the following program parameters: a) Eligible CSOs must be 501(c)(3) tax-exempt organizations in good standing with the Internal Revenue Service and in compliance with all applicable laws and requirements, demonstrate legal expertise in assisting students with student loan and tuition recovery-related matters, and not charge students for services. b) Eligible students must have been enrolled at a California campus of, or be a California student who was enrolled in an online campus of, a CCI institution, and be eligible to apply for debt relief from the USDE or other student financial aid relief. AB 573 Page 5 c) The program is designed to operate as follows: i) BPPE is required to notify the Attorney General (AG) of all unlawful CCI closures, and provide related pertinent information, within 15 days of the effective date of this bill; ii) The AG, or entity contracted by the AG to perform these duties, is required to, within 90 days of the notification, solicit grant applications and select one or more eligible CSO and determine the share of grant funds available to the CSO. iii) The AG, or contracted entity, shall enter into a grant agreement with the selected CSO(s) to ensure funds are used exclusively for authorized purposes. Unused funds are required to be returned to the STRF. The agreement may be terminated, and funds may be required to be repaid, if the AG or contracted entity determines the CSO materially breached the agreement. The CSO must be provided reasonable opportunity to resolve the breach. iv) The CSO is authorized to prioritize low-income students if demand exceeds available grant funds. d) A CSO that receives grant funds is required to report to the AG, or contracted entity, quarterly through the grant period on all of the following: i) The number of eligible students served pursuant to the grant agreement; AB 573 Page 6 ii) A detailed summary of services provided to those students; iii) The number of STRF claims referred to the bureau; iv) The number of federal loan forgiveness claims filed and the number of those claims approved, denied, and pending; v) Any other information that is deemed appropriate by the Attorney General or qualified entity, as applicable. e) The AG or contracted entity is required to make the quarterly reports available to the Legislature and the BPPE upon request, and to provide the Legislature and BPPE a final report summarizing the information submitted promptly following the time when all funds are expended by the grantees or by August 1, 2018, whichever is earlier. f) Provides that funds shall be distributed to preapproved CSOs as follows: i) Fifty percent shall be distributed to the grantee within 30 days of the grantee entering into a grant agreement; ii) Twenty-five percent shall be distributed to the grantee upon the submission of the grantee's second quarterly report. AB 573 Page 7 iii) Twenty-five percent shall be distributed to the grantee upon the submission of the grantee's third quarterly report. g) Provides that eligible CSOs may use grant funds received to pay the costs of assisting eligible students who have been served after the date of closure until June 30, 2018, or until any later date as may be determined necessary by the Attorney General. h) Provides emergency rulemaking authority for implementation of this program. 7)Declares this bill an urgency statute to take effect immediately. The Senate amendments clarify and narrowed several provisions of this bill, as outlined in the aforementioned "Summary" section, and significantly narrowed the scope by removing several sections of this bill, as follows: 1)Remove language that would have provided California Community Colleges (CCC) $100,000 to conduct an outreach and marketing campaign to former CCI students; 2)Remove language that would have provided former CCI students impacted by CCIs closure with a CCC Board of Governor's Fee Waiver until July 1, 2018; 3)Remove language that would have provided Heald College students eligibility to claim an economic loss under the STRF; AB 573 Page 8 4)Remove language that would have increased the maximum amount of the STRF to $50 million. 5)Remove language that would have required the BPPE to establish a "Closed School Task Force" to respond to the closure of institutions; and, 6)Remove language that would have created an ongoing grant fund program for legal aid organizations to assist students impacted by future school closures. EXISTING LAW: 1)Establishes the BPPE within the Department of Consumer Affairs with the primary function of providing protection of students/consumers through the regulation and oversight of private postsecondary educational institutions. BPPE oversight activities are funded by licensing fees paid by regulated institutions. Existing law also provides for a variety of exemptions from oversight by the Bureau for specific types of institutions, including institutions accredited by the Western Association of Schools and Colleges (WASC). However, pursuant to SB 1247 (Lieu), Chapter 840, Statutes of 2014, all for-profit institutions serving veterans and receiving federal Title 38 funds, regardless of accreditation status, are required to obtain BPPE approval by January 1, 2016. (Education Code Section 94800 et seq.) 2)Establishes the STRF, administered by the BPPE, to relieve or mitigate economic loss suffered by students enrolled at a non-exempt private postsecondary education institution due to the institutions' closure, the institutions' failure to pay AB 573 Page 9 refunds or reimburse loan proceeds, or the institutions' failure to pay students' restitution award for a violation of the Private Postsecondary Education Act. STRF is capped in statute at $25 million. Institutions are required to assess students an amount established in regulation by the BPPE and remit fund to the BPPE for STRF. In 2010, that amount was established at $2.50 per $1,000 of tuition charged. In 2013, that amount was reduced to $0.50 per $1,000. In 2015, this amount was reduced to $0.00, as the STRF had exceeded the statutory cap (STRF is currently at approximately $28 million). (Education Code Sections 94923 to 94925) FISCAL EFFECT: According to the Senate Appropriations Committee: 1)Restoration of Financial Aid Award Years: Approximately $9.6 million to restore Cal Grant awards for affected students for two years ($7.9 to restore one year and $1.7 to restore the second year). (General Fund) 2)Legal Assistance Grants: $1.3 million appropriation from the STRF. (Special funds) COMMENTS: Background. CCI institutions offered a range of programs, including certificate programs, with tuition and fees that ranged from $13,100 and $21,338, associate's degree programs with tuition and fees that ranged from $33,120 and $42,820, and bachelor's degree programs that were between $60,096 and $75,384. According to a 2014 complaint filed by the Consumer Financial Protection Bureau (CFPB), most students attending CCI were low-income, or the first in their families to seek an education beyond high school. In 2012, CCI reported that 85% of its students had family incomes of less than $45,000 a year. An estimated 57% of CCI students had household incomes of $19,000 or less, and 35% of CCI students had a household AB 573 Page 10 income of less than $10,000. Most students attending CCI received federal financial aid; according to CCIs filing with the Securities and Exchange Commission, CCI received 84.8% of net revenue from federal financial aid (Title IV: Pell Grants and Federal Loans). Federal rules require that institutions receive at least 10% of revenues from non-Title IV sources ("90/10 rule"); however, this can include state aid, veteran's aid, and private loans (among other sources). According to the allegations in the CFPB complaint, in order to meet the 90/10 rule, CCI increased tuition in order to create "funding gaps" so that students would be required to take out private loans to pay for their education. CCI offered students their own "Genesis" loans to cover the funding gaps. According to CFPB, by 2014 the outstanding balance of Genesis loans totaled $560 million. The aforementioned CFPB complaint sought, among other monetary penalties and student relief, the rescission of all CCI private loans originated since 2011. In addition to the CFPB complaint, CCI faced a series of legal actions and investigations into unlawful practices, including by 20 state attorneys general, several federal agencies, and the USDE. These complaints include allegations largely focused on misrepresenting career options (promising lifetime placement services and providing, at best, temporary assistance), falsifying job placements (including counting one-day employments, paying employers to temporarily hire graduates, and falsifying "self-employment" statistics), and promoting student reliance on CCIs loans that required students to begin repaying while still in programs (staff members were provided bonuses for collecting loan payments, and were encouraged to publically remove students behind on loan payments from class). On June 19, 2014, USDE announced that it had placed CCI on an increased level of financial oversight. Financial stability is AB 573 Page 11 a requirement of participation in federal financial aid programs under Higher Education Act Title IV; CCI had failed to provide USDE with required financial disclosures. In response to the USDE decision to delay financial aid funds for 21-days, CCI, which was already facing a cash flow shortage, announced it would likely close. In the summer of 2014, a CCI bankruptcy would have impacted 72,000 students nationwide, with approximately $1 billion in (potentially dischargeable) federal loans. On June 23, 2014, USDE and CCI signed a memorandum of understanding requiring the company to develop a plan to sell and teach-out programs over the next six months. As a part of the agreement, CCI continued enrolling new students in programs. On June 26, 2014, CalVet suspended CCI institutions participation in Title 38 programs due to the United States Securities and Exchange Commission filing indicating CCI was fiscally unstable. In August of 2014, CalVet withdrew institutional approval at all institutions owned and operated in California by CCI. The 23 campuses (Heald, WyoTech and Everest) were prohibited from receiving GI bill benefits. In order to continue using Title 38 benefits, veteran students were required to transfer/enroll in a California State Approving Agency for Veterans Education eligible school. On November 20, 2014, the Education Credit Management Corporation (ECMC), a nonprofit organization that operates a large student-loan guaranty agency, announced it would purchase 56 campuses from CCI. ECMC created a nonprofit subsidiary, called the Zenith Education Group, to manage the campuses. In December of 2014, USDE approved the sale, and as part of the agreement, CCI/ECMC discharged private student loans (approximately $480 million; 40% of the private student loans) for students whose campuses were sold. Earlier in the year, the CFPB had accused CCI of luring students into its "Genesis" loan program in order for the campus to meet the federal "90/10 rule" with false promises about career counseling and misrepresented AB 573 Page 12 job placement statistics. A coalition of student, consumer, veterans and civil rights groups opposed the sale of the CCI campuses, noting that ECMC did not have experience running educational institutions. According to the coalition letter to the USDE, "in the field where ECMC does have experience, its actions have veered more than occasionally into dubious terrain, using ruthless tactics to hound debtors to the point where the company has been sanctioned and reprimanded by judges for abusing the bankruptcy process." The coalition also noted that the terms of the sale would not give students the choice of having their federal loans discharged. California campuses were not included in the sale to ECMC; press reports contributed ECMC's decision largely to a lawsuit that had been filed in October of 2013, (which remains pending) by Attorney General Kamala Harris that contained a range of allegations about deceptive marketing and job-placement claims, in violation of a 2007 judgment. On April 14, 2015, the USDE announced a $30 million fine against Heald's Salinas and Stockton campuses for fraudulent placement and other advertising (CCI appealed this fine). The decision effectively barred all Heald campuses from receiving federal funds for new enrollments. On April 16, 2015, CSAC permanently terminated Heald's eligibility for the Cal Grant program (Everest and WyoTech were already not eligible). On April 17, 2015, the BPPE issued an emergency decision prohibiting Everest and WyoTech campuses from enrolling new students. CCI closed all campuses on April 26, 2015, and filed bankruptcy on May 4, 2015. Federal loan forgiveness. Over the past four months, the USDE has announced expanded loan forgiveness options for CCI students AB 573 Page 13 who were affected by the closure or by the unlawful practices of the institution. As it currently stands, the following students are eligible to apply for student loan discharge: 1) students who can show that CCI violated state law (Heald students in most programs between 2010 and 2014 have been deemed eligible by USDE to apply through an expedited loan forgiveness pathway); and, 2) students who were enrolled after June 20, 2014. The USDE has indicated additional eligibility and financial aid relief may be established. Numerous organizations have raised concerns regarding the application process established by the USDE. For example, an August 18, 2015, letter to the USDE requesting changes to the application process 11 states Attorneys General said the current process would "require an understanding of contract, tort or unfair practices statutes" to successfully navigate. Purpose of this bill. According to the author, "AB 573 will provide $1.3 million in legal assistance grants to help students with the loan forgiveness and tuition recovery process. Only an estimated 6% of students eligible for a loan discharge claim it. CSOs provide loan relief assistance to low-income students. Unfortunately, these organizations are not sufficiently funded to meet demand and are currently turning away and wait-listing student clients. This bill will provide funding to assist students with the loan discharge process. Helping California students cancel as much of their student debt burden as possible will be good for these students, cost the state of California very little, and provide benefits now and in the future to California's economy." The author further notes that "AB 573 will restore California education grant eligibility for students by providing up to 2 years of restoration in the Cal Grant and California National Guard Educational Assistance programs. This will ensure approximately 3,400 Heald students are not harmed by the award year limitations in these programs." AB 573 Page 14 GOVERNOR'S VETO MESSAGE: Assembly Bill 573 would extend Cal Grant eligibility for former students of Heald College and create a grant program within the Attorney General's office to fund nonprofit organizations providing free legal services to former students of Corinthian Colleges. I am sympathetic to the many students who were enrolled at Corinthian Colleges when the company abruptly shuttered its doors earlier this year. I signed SB 150, which prevents students whose loans have been discharged from being penalized a second time with a significant tax bill on the value of the loan discharge, which they can ill afford to pay. The U.S. Department of Education has taken the matter of loan discharge seriously. In recent months, it has greatly eased the burden of filings for many students, and its work to provide a simple, swift and fair process for students continues. As such, it appears premature to create an attorney grant program, especially one that provides little direction on how funds should be used. While the bill's provisions to extend Cal Grant eligibility for Heald students are well-intentioned, I am not comfortable creating new General Fund costs outside of the budget process, particularly given the Cal Grant augmentations already included in this year's budget. Analysis Prepared by: Laura Metune / HIGHER ED. / (916) 319-3960 FN: 0002475 AB 573 Page 15