The 20-page report from the state Legislative Analyst's Office served as an update to lawmakers on how the tougher rules they approved last year have affected higher education.
The Legislature adopted the new standards in a bid to steer students toward a better-quality education by avoiding institutions with high loan default rates and low graduation rates, and to ensure a better investment for taxpayer dollars.
Under the rules, schools now must show a graduation rate of at least 30 percent and a loan default rate of less than 15.5 percent to participate in the Cal Grant program.
The report found the new standards have worked largely as intended, disqualifying a total of 154 schools from the Cal Grant program, although it said the move has limited student access to postsecondary education in the short term. This year the new regulations will save the state an estimated $50 million.
The rules affected postsecondary institutions with at least 40 percent of students receiving federal aid, which largely eliminated community colleges, public universities and most private, nonprofit colleges, and left many for-profit trade and technical schools.
Those schools have come under fire in recent years for their poor graduation rates, recruiting practices and high level of taxpayer-subsidized debt among their students.
Of Cal Grant participating institutions, 35 percent of schools are now ineligible, including 80 percent of for-profits, the report stated.
The report makes three recommendations to improve the system, including a new assessment for measuring loan default rates, which can be easily manipulated.
Loan repayment rates and students' debt-to-earnings ratios must be used as a standard instead, the report said.
The report also proposed that the 30 percent graduation requirement should be implemented for all Cal Grant-participating schools, including community colleges, to ensure the institutions are providing value for taxpayers.